Oversight and nonprofits

You’ve read about the recent arrests of two former employees at the Greater Miami Chamber of Commerce. They face state charges of stealing $1.9 million.

This appears to be the most recent in what has become a long line of improprieties at local nonprofit organizations.

If you’re a professional with any kind of ambition, chances are you’ve learned that service on a nonprofit board is an excellent way to help the community, build your network and become recognized as a community leader. But right now you may be wondering what kind of responsibility or liability you took on when you agreed to board service.

The answer is clear: The ultimate fiduciary responsibility in a nonprofit organization rests with the board.

According to lawyer Henry H. Raattama Jr., shareholder at Akerman Senterfitt, “A nonprofit board member who fails to exercise his or her board responsibility with the requisite standard of care, like a for-profit board member, can be held responsible for losses caused by financial improprieties or otherwise.”

Serving on the board of a nonprofit is like sitting on the board of a public company. A public company gets its funds from shareholders; the company’s board is obligated to protect those shareholders’ interests. Likewise, a nonprofit gets its funding from the government, from the public, or from membership fees. The board has the obligation of stewardship of those financial resources. Board members are expected, by law and by the public, to see that those resources are used for the purpose intended.

“But what about management?” you might ask. “Our nonprofit has an executive director and a chief financial officer. When we hired them, didn’t they accept that responsibility? After all, everyone says it’s the board’s job to guide the staff, not to interfere with day-to-day operations.”

The most important component of a nonprofit board’s responsibility is to oversee financial management. One of the ways board members fulfill this responsibility is to hire competent, ethical management. But that doesn’t get you off the hook. Your obligation includes overseeing planning and budgeting, accounting and payroll, even taxes. That doesn’t mean that every board member should be a financial expert, although you definitely need at least one. But you do need to be financially literate and to understand reporting presented by management. You have a duty to manage the organization’s accounts by checking that resources are used appropriately and ensuring that reporting is accurate. It is critically important to ensure that controls are in place to guard against fraud.

How can your board protect your nonprofit from fraud, and fulfill your fiduciary duty?

Many experts are suggesting that nonprofits should adopt some of the provisions of the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley mandated new measures designed to safeguard the interests of public company shareholders. Now some state boards of accountancy are considering adopting parts of the act for nonpublic companies, and some states’ attorneys general are proposing elements be applied to nonprofit organizations. Applying selected provisions voluntarily will give nonprofit boards tools to help them guide proper financial management. It may also increase credibility with funding sources.

Some recommendations:

• Sarbanes-Oxley beefed up the independence requirements for auditors and audit committees, and so should nonprofits. Your auditors shouldn’t perform your bookkeeping, set up your computer systems or give you investment advice — they shouldn’t be auditing their own work. You may wish to change audit firms every five years, or at least request they rotate lead and reviewing partners. No member of management should be on the audit committee, and committee members shouldn’t get any extra compensation.

• Sarbanes-Oxley requires the chief executive officer and chief financial officer to certify, in writing, that financial statements fairly represent the conditions and operations of the company. While the criminal sanctions for false certification in the public company arena won’t apply to your nonprofit, requiring written certification signals the importance the board places on the accuracy of reporting. Tax forms (which are public information) already require an officer’s signature, but increased board scrutiny may improve accuracy. Remember, the ultimate financial responsibility rests with the board.

• Sarbanes-Oxley requires public company management to evaluate and report on the effectiveness of internal controls. Even if you change nothing else you should do this, though you may wish to seek outside assistance rather than relying on management’s assessments. These controls might include policies on use of restricted funds and review of off-balance sheet transactions. They would most certainly include segregation of duties, like having different people write, sign and mail checks, which could have prevented at least one of these notable incidents.

While the responsibility may seem daunting, don’t let it scare you away from board service. You may have joined the board to help your community; they may have selected you for fund-raising skill. No matter why you chose to serve, knowing your responsibilities will make you a better board member.

Steven M. Berwick, a CPA, is an audit partner at Kaufman Rossin. in Miami. He can be reached at sberwick@kaufmanrossin.com