Updated: Wed, 11/14/2012 - 01:08

Nonprofits: Board oversight and role of auditors critical to financial health

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Nonprofits: board oversight and role of auditors crucial

Currently, my colleagues and I provide professional accounting services to approximately 50 local nonprofit organizations of all types and sizes in various tax, audit and consulting roles.

With more than 30 years of experience providing professional services to nonprofits, I’ve observed that the strength of a nonprofit organization can be gauged by the quality of its board of directors and its ability to effectively govern the organization.

When a nonprofit approaches our firm for support, the first item we request is a list of their current board members in order to begin determining how effective the board governance truly is.

By law, a corporation operating as a separate legal entity is required to form a board of directors that represents its owners or stakeholders in the case of for-profits and represents the public in the case of nonprofits. The board of directors is responsible for the overall health and success of the organization and its ability to fulfill its mission.

When creating a strong board of directors, nonprofits should carefully select a mix of community leaders representing various industries and diverse perspectives, major constituents and individuals with a passion for the organization’s mission. Board members should include experts in finance, fundraising and business management to ensure strong oversight of management activities.

In addition, board member rotation should be mandatory (with some room for exceptions) to eliminate the possibility of a monopoly of the nonprofit’s mission and management. If one person is generally guiding the majority of the discussion during board meetings, this could lead to an unengaged board and an unhealthy organizational dynamic.

However, even more important than quality board member selection is the board’s role in the financial oversight of the organization.

Unfortunately, many nonprofits tend to pinch pennies when it comes to hiring a bookkeeper or accountant and support staff, making these organizations vulnerable to fraudsters within the organization who could take advantage of ineffective internal controls, including lack of board oversight of the organization’s financial affairs.

To pre-empt a potential accounting fraud violation, it’s crucial to put internal controls in place as an effective counter measure. For example, enlisting the help of a qualified accounting firm specializing in financial audits is a great start. However, while it’s true that a financial statement audit is a smart first step, it will never mitigate problems arising from poor board financial oversight.

While it’s customary to delegate board responsibility to various board committees, such as executive, finance and fundraising committees, this is often taken too far. If a certain committee becomes inactive or is inadequate, the whole board is placed at risk.

For instance, in an attempt to economize, many nonprofit organizations will delegate both the day-to-day financial duties and oversight of the financial policies and procedures to the board finance committee.

This is a daunting task for a single board finance committee, which can become overwhelmed by the workload and may not be capable of adequately auditing their own policies and procedures.

Instead, it is recommended to set up both a board finance committee and a board audit committee to act as two separate entities, ensuring that both the financial health of the organization and management policies and procedures are completed within the set internal parameters to avoid fraud.

In addition, a nonprofit board will generally want to include a financial-type expert as the board treasurer or as a third-party consultant. An external auditor can help set up a suitable bookkeeping system, generate financial statements and conduct basic financial analysis and annual financial audits. In addition, he or she can help nonprofit organizations write comprehensive financial policies and procedures.

However, it’s essential for a nonprofit board to understand and to accept the fact that an independent audit is not designed to specifically identify fraud and that an audit will never mitigate risks related to poor board oversight.

At the end of the day, the benefits of putting financial safeguards in place outweigh any potential savings that may come from not doing so. Nonprofit boards should be proactive, vigilant and responsible to ensure the longevity of the organizations they represent.

Richard Henry is a certified public accountant and business advisor at Holland, Henry & Bromley, LLP. He can be reached at 912-235-3410 or richard@hhbcpa.com.

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