The
heightened focus on nonprofit accountability in recent years has spurred calls
for foundations and public charities to have adequate policies and procedures
in place to ensure sound governance. One such policy that has become a
recommended best practice for the sector is a whistleblower protection policy,
yet most non-profits still don’t have one.
Now,
in the wake of numerous financial scandals at charities nationwide, and in the
recognition that non-profits lose over $10 billion annually to fraud, the IRS has introducied a revised form 990 that requires nonprofit organizations to
reveal in more detail than ever before how they function. This is extremely
important as potential and existent donors increasingly look at 990's to
determine how the organization is spending its dollars.
States
are following suit. California has already enacted legislation that mirrors
parts of SOX with the Charity Integrity Act which spells out the makeup of a
non-profit’s audit committee, and requires that non-profits make their annual
audits available to the public. The law also requires board approval of
compensation packages for the CEO and CFO. Nearly 20 states are considering
similar legislation.
"This
is going to have a major impact on the way nonprofit public charities
operate," said Thomas A. McLaughlin, a senior manager in the nonprofit
practice at the Boston office of Grant Thornton, a national accounting firm.
"It's asking in great detail about governance and leadership, particularly
about who runs the organization, including paid and volunteer leaders, as well
as any consultants. It doesn't leave a lot of wiggle room in the
reporting."
The
proposed new form asks direct questions about governance, requires information
about past officers and directors who were highly compensated. And it asks if
nonprofits have whistleblower and document destruction policies.
William
Josephson, former chief of the charities division in New York, said the
intention of the form is clear: "We want to know what you're actually
doing. Tell us what you're doing, up-front, every year."
Insurance
companies are also pressuring non-profits to adopt strict corporate governance
standards, due to increased exposure. For audit committee members at
non-profits, all these proposed and real measures may mean longer hours and a
possible increase in liability exposure.
We
give non-profits, religious and educational institutions an extra measure of
trust to do the right thing and for the most part, justifiably. But when we hold
people and organizations to a higher standard, there is an extra measure of
hurt when they don’t and are implicated in a scandal or unethical acts.
Make
sure your non-profit does the right thing:
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Have excellent systems in place, including a whistle blowing policy. An
Association of Certified Fraud Examiners study indicated hotlines are the best
way to uncover fraud in organizations.
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Have the CEO/Executive Director and the CFO sign off on financial statements
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Make sure you have signed conflict-of-interest statement for all pertinent
staff, volunteers and board members.
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Ensure you have a compensation committee reporting to the executive committee
that sets market-based goals for its CEO.
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In addition to overseeing the annual audit, the Audit Committee should oversee
a continuing “internal-controls audit” that monitors internal procedures.