1. Non-Profit Financial Practices and Procedures for ALL by Randy D. Barrack, Ed.D., Ph.D.

2. Why Financial Policies and Procedures for ALL, i.e., small, medium, or large nonprofit organizations?

3. Financial policies: clarify the roles, authority, and responsibilities for essential financial management activities and decisions. In the absence of an adopted policy: staff and Board members are likely to operate under a set of assumptions that may or may not be accurate and productive. – Nonprofits Assistance Fund

4. To avoid or diminish financial and accounting risks that might threaten the organization’s very existence or decrease its effectiveness, the board needs to be aware of proper financial processes and practices. The Fiduciary Role Role Clarity Legal Requirements

5. The Fiduciary Role Functioning as a fiduciary means your board is responsible for the well being and financial health of the organization. The board’s decisions must not place the organization in financial jeopardy. As individual fiduciaries, your board members must understand they may be considered personally liable for their actions and inaction. Even if they are not all financial wizards, they must be “financially literate” enough to ask the right questions when things are unclear.

6. Role Clarity The biggest risk factor occurs when board members misunderstand their duties or willfully disregard them. If your board does not realize one of its duties is to monitor the organization’s financial matters and management activities, it has already abdicated its oversight role. You can begin to reverse this situation by drafting clear job descriptions that outline duties and define individual responsibilities. Clearly state what “fiduciary duty” means.

7. Legal Requirements Ignoring legal requirements poses serious risks. Even if your board is not physically filing papers and paying the necessary taxes, it must make sure that these tasks are carried out. The easiest way to do that is to have an annual calendar of must-do tasks and to make sure required statements and supporting documents are included in board packets for review and verification; they can then be voted on in a consent agenda and the vote is recorded in meeting minutes. Items to be verified include payment of payroll taxes, filing of Form 990, filing of state registrations and possible fundraising permits, and any applicable certification documents.

8. Understanding the financial mechanics and responsibilities o Ensure that the organizational structure and staffing model is appropriate o Provide financial management, including budget preparation, financial reporting and regulatory reporting, ensuring all reports are submitted in compliance with regulatory requirements (e.g., GAAP) o Establish and maintain internal controls, understand and access risk and conduct monitoring activities o Manage day to day operations o Safeguard the organization assets o Ensure organization compliance with law and regulations o Provide analysis and support to the board providing it with regular process reports on the strategic plan, emerging issues, proposal for new initiatives, financial position, operating issues and fundraising activities and results o The board must delegate enough power to permit an effective administration of daily operations

9. The Board of Directors of a nonprofit have an overarching purpose to guide the organization’s direction, activities and financial security towards fulfillment of its mission. For smaller nonprofits with no staff, the Board is termed a “working board” and directors are equally responsible for supervising and executing the activities of the organization. For larger nonprofits with many staff the directors often move away from overseeing or managing day to day activities in place of fundraising and strategic direction.

10. All board members are ultimately legally responsible for the activities of the nonprofit therefore it is important each board member understands his/her duty to the organization and is prepared to serve successfully in the role.

11. Internal Revenue Service Enforcement The price of tax exemption for an organization is complete disclosure of its activities every year. Providing all the information required on the form likely will necessitate the assistance of a tax professional versed in this area of tax law. “New 990.” Nonprofits who have been approved as tax exempt organizations by the Internal Revenue Service have been given a “gift/grant by the American taxpayer.”

12. “…transparency can only create an environment of trust where all parties accept elevated responsibility to appropriately manage information.” - Remarks of IRS Commissioner Douglas Shulman before the American Bar Association May 2008

13. The redesigned Form 990 was officially released on December 20, 2007, approximately six months after the IRS introduced a draft version of the form and solicited comments from the public. The new form came into use with returns filed for tax year 2008. The general purpose of the redesign was to update the Form 990 to reflect the many significant changes that have occurred in the nonprofit sector over the past 28 years, specifically addressing the increased demand for transparency and accountability.

14. After releasing the Form 990 discussion draft in June 2007, the IRS held a 90-day comment period, during which more than 3,000 pages of suggestions from the public were received in letters and e-mails. These comments were the basis of many of the modifications that were incorporated into the final version of the form.

15. Form 990, Part VI - Governance - Who Must Complete Must all organizations complete Part VI ? Yes, all organizations that file Form 990 are required to answer all of the questions in Part VI regarding its governance structure, policies, and practices. This section included suggestions received during the public comment period. Concept of shared nonprofit governance in being transparent and accountable.

16. Effects of SOX on Nonprofit Organizations The Sarbanes–Oxley Act of 2002, enacted July 30, 2002), also known as the "Public Company Accounting Reform and Investor Protection Act" (in the Senate) and "Corporate and Auditing Accountability and Responsibility Act" (in the House) and more commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law that set new or expanded requirements for all U.S. public company boards, management and public accounting firms. There are also a number of provisions of the Act that also apply to privately held companies, for example the willful destruction of evidence to impede a Federal investigation.

17. Effects of SOX on Nonprofit Organizations As a result of SOX, top management must individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased the oversight role of boards of directors and the independence of the outside auditors who review the accuracy of corporate financial statements. Although most provisions of Sarbanes-Oxley apply only to public companies, at least two criminal provisions apply to nonprofit organizations: provisions prohibiting retaliation against whistleblowers prohibiting the destruction, alteration or concealment of certain documents or the impediment of investigations. Violators may be fined and/or imprisoned for up to 20 years.

19. Managing Structure, Accountability, and Ethics Yesterday’s Board Practices Board members selected without screening process. Either board members do not receive orientation or the orientation is a social gathering. SOX Best Practices for Today’s Board Nominating committee rigorously screens prospective members and submits nominations to full board for vote. Board members receive extensive orientation including job description, performance expectations, bylaws, complete financial documentation, strategic plan, and other relevant documents

20. Yesterday’s Board Practices Board members are expected to be passive at board meetings; agenda is primarily staff-driven. Board culture reflects belief that the nonprofit is a “Mom and Pop” operation governed by well-meaning volunteers. SOX Best Practices for Today’s Board Board members are expected to review all materials in advance of the board meeting and fully prepared to analyze, deliberate, and debate, if necessary, the issues at hand. Board members know how to read and analyze financial reports and spot important trends. Board culture reflects the reality that the nonprofit is a financially viable business enterprise governed by competent directors and their leaders whose primary allegiance is to the mission of the organization.

21. Yesterday’s Board Practices Board members are known to have profited from their position on the board through the nonprofit’s contracts with their businesses. Board members are the nonprofit’s “aristocracy” and are permitted to order the staff about and/or demand favors. SOX Best Practices for Today’s Board Board members are required to sign a conflict-of-interest statement on an annual basis for the purpose of identifying any existing, or possible, conflicts of interest. Board members are prohibited from having contracts of any kind with the nonprofit or other types of self-dealing. The board orientation clearly articulates that the board’s only employee is the executive director (ED) and stipulates that all board members will conduct themselves in a professional manner at all times.

22. Yesterday’s Board Practices Directors’ and officers’ insurance is only for large nonprofits. Audits are only for large organizations SOX Best Practices for Today’s Board All boards are indemnified through the purchase of D&O insurance. An annual audit or financial review is required on an annual basis. An audit may be stipulated depending on the organization’s budget and relevant state legislation. However, smaller nonprofits should arrange for a review of the financial records.

23. Why The federal interest in nonprofit organizations … and the need for a Financial Policies and Procedures Manual?

24. John D. Rockefeller and John Gardner’s THIRD SECTOR. Alexis de Tocqueville’s the “art of association.” Growing federal threat to American volunteerism. Third Section might be absorbed into government.

25. The American Society is representative of the three-legged stool. Communities are stronger and more resilient when business, government and nonprofit groups work together—the three-legged stool—to address challenges as they arise. Government (tax payer supported) Business (for profit corporations) Nongovernmental Organizations (nonprofit corporations) 25

26. Beginning with President Johnson’s Great Society funding to nonprofits in the 1960s. Expansion of federal funding during the early 1970s. By 1974 government funding for the nonprofit sector nearly equaled that of private giving! In that year alone, nonprofits received $23.2 billion from government and $25.3 billion form philanthropy. Another $32.1 billion came from their own endowment income and fees for services.

27. The economic strength of the nonprofit sector has increased in recent years and the sector is now the third largest employer in the U.S. Nearly 2 million nonprofit organizations employ 10.7 million people and produce revenue in excess of $1.9 trillion. Copyright 2015 | Nonprofit HR The Nonprofit Employment Practices Survey is trademarked by Nonprofit HR LLC.

28. The Governing Documents For Board Orientation

29. The Tools of Governance Articles of Incorporation The Bylaws Policies & Procedures: Board Policy Manual Financial Policies and Procedures Manual Human Resource Manual Strategic Plan or Goals Budget for Current Year Position Statements or Platform For Board Orientation

30. The Board - Staff Relationship Two Elements, One Team Board focuses on governance; being visionaries; strategically moving forward. Staff manages the day to day operations. Consider it a partnership, alliance, or collaboration between board and staff to achieve the goals of the organization. Board must avoid micromanagement. For Board Orientation

31. Board Responsibilities Manage the organization’s resources. Determine, monitor and strengthen programs and services for members and constituents. Promote the organization’s image. Ensure legal and ethical integrity in the organization. Help recruit new leaders. Assess and measure organizational performance. For Board Orientation

32. Board Responsibilities Determine and understand the organization’s Vision, Mission and Purpose. Support the Executive Director and assess his or her performance. Ensure organizational planning and goal setting. For Board Orientation

33. Role of the Executive Director/CEO The board of directors appoints the Executive Director to be the Secretary- Treasurer and Chief Executive Officer of the Association. The administration and management of the Association are vested in the Executive Director employed by and directly responsible to the board of directors. He or she serves as a nonvoting member of the board of directors and its executive committee. For Board Orientation

34. Role of the Treasurer Oversees all funds and financial records. Prepares/contributes an annual budget for approval. Keeps records of all income and expenses. Responsible for filings required by law associated with finances. Performs such duties as identified in the bylaws or assigned by the board of directors. For Board Orientation

35. Financial Responsibilities The board has control of the finances of the Association. The board should carefully review all financial reports. The executive director develops and proposes an annual budget. The executive director, with assistance of the association’s accountant, will present a financial report for the previous period, at each meeting. An audit or review is performed annually by an independent accountant. For Board Orientation

36. Legal Obligations of Board Members The board is both responsible and liable for the organization. The board and the law require every board member to follow the rule of the reasonably prudent person and the principle of good faith. For Board Orientation

37. The Rule of the Reasonably Prudent Person means the board will not: mismanage the association by deviating from fundamental management principles, such as planning carefully for the future of the association, regularly reviewing the financial status of the association, and monitoring compliance with board policies. fail to govern by utilizing all control systems to govern the association. be involved in self-dealing that provides personal gain to board members. For Board Orientation

38. The Principle of Good Faith means that board members will: attend all board, committee, and retreat training meetings to be a part of board actions. read and understand the association’s policies and bylaws. pay attention to corporate affairs and keep informed about organization activities. ensure that the association is in compliance with legal requirements. avoid self-dealing. For Board Orientation

39. Legal Requirements of Board Members All board members are expected to recognize and accept their legal position as governing agents of the association. A board member of an association occupies the role of a fiduciary with regard to those served. A fiduciary is a person who holds something in trust for another. If a board member violates his/her trust or fiduciary duty, he/she may be subject to legal consequences. The duties and responsibilities of board membership attach automatically when board members accept the office. For Board Orientation

40. Understanding financial basics… Setting up and monitoring key financial indicators. Ensuring adequate control mechanisms Approving the budget Overseeing the organization’s legal obligations.

41. Specific questions board members should ask: Is our financial plan consistent with our strategic plan? Is our cash flow projected to be adequate? Do we have sufficient reserves? Are any specific expense areas rising faster than their resources of income? Are we regularly comparing our financial activity with what we budgeted? Are our expenses appropriate? Do we have the appropriate checks and balances to prevent errors, fraud, and abuse? Are we meeting guidelines and requirements set by our funders?

42. Sound financial management is the foundation upon which an association’s operations rest. Associations—which must comply with complex rules pertaining to nonprofit fundraising, political activity, and tax-exempt status—tend to manage the majority of their financial operations in house, save for audits and tax management, according to ASAE benchmarking research. More than 80 percent of associations with more than 10 staff have at least one full-time position dedicated wholly to finance. As associations’ financial operations have moved increasingly to the digital realm, the security of both an organization’s financial data and that of its members and customers has become a chief concern. In nearly three-quarters of associations, the board of directors has final authority over the organization’s budget, though oversight of investments is most often delegated to staff or to a board finance committee, particularly among organizations with more than $1 million in reserves. Posted on the ASAE Website, retrieved 03.25.2016

43. So Why Do We Have Processes and Procedures? The purpose for creating an internal control system through defining and documenting processes with well-written procedures boils down to a few very basic reasons: Compliance Operational Needs Managing Risks Continuous Improvement

44. Complying with laws and regulations should be the most basic function of an organization. Let’s face it… if your organization is having trouble in performing the rudimentary function of obeying laws and regulations, then it is likely struggling even more at being effective and successful in fulfilling its core missions. If compliance is an issue in your organization, then creating well-defined processes documented by procedures in order to meet your legal and regulatory requirements should be a high priority. Policies & Procedures Improve Compliance

45. Ensure Operational Needs Are Met through Policies and Procedures What is really important in your association? What is fundamental for its success? Are practices associated with them being steered by the executive director or your elected leadership? How much visibility and transparency is there into the effectiveness of these key processes?

46. The important role of PROCDURES: to ensure processes fundamental to the association’s success are properly guided by management (the executive director and staff) performed in a consistent way that meets the association’s needs that important related information and data are captured and communicated.

47. Drive Improvement and Internal Control Reviewing data for process effectiveness is one form of internal control and should be an integral part of any business process. Are your objectives being achieved? Are the objectives meaningful and reflect the processes’ importance and risk? Using internal controls, the necessary corrections can be identified and implemented as a result of the review. Your procedures describe your process and its internal controls.

48. Your Policies and Procedures help your association by: providing policy makers and employees with a handy reference to daily business operations, common association activities, or routine organizational tasks. providing new personnel with an operations manual will be useful for getting them trained and up to speed, fast on such things as internal controls. After all, with standard operating procedures in place, training is faster and interruptions are reduced.

49. Improvement occurs when we compare the prior condition to the current condition. Improvement is always a question of “as compared to what?” By documenting your business processes with procedures, you will have a foundation for improvement. A record of the standard work that was performed at a point in time. What is more important than control, training and improvement? Procedures are important for controlling processes, documenting the standard work that was performed at a point in time. And training workers on the business process. Use standard operating procedure templates that save time, guide you through common best practices and provide a format that you populate with your own association differences.

50. FIVE ESSENTIALS FOR FINANCIAL POLICIES The purpose of the financial policy is to describe and document how the board wants financial management activities to be carried out. In order to accomplish this, every financial policy needs to address five areas: 1. Assignment of authority for necessary and regular financial actions and decisions, which may include delegation of some authority to staff leaders. 2. Policy statement on conflicts of interest or insider transactions. 3. Clear authority to spend funds, including approval, check signing, and payroll. 4. Clear assignment of authority to enter into contracts. 5. Clear responsibility for maintaining accurate financial records.

51. The TOP TEN types of FINANCIAL MALFEASANCE (misconduct or wrongdoing) and NONFEASANCE (failure to perform an official duty) by nonprofit boards. - Jon Pratt, executive director of the Minnesota Council of Nonprofits

52. 1. Ineffectually scrutinizing the overall enterprise. Proper financial oversight requires board members to receive (and read) timely financial statements. An obvious red flag is late or incomplete financial reports, but statements that are either too voluminous or too sketchy can be just as bad. Three frequent blunders of boards are: A.they don't receive or distribute to other members the organization's IRS Form 990, the informational disclosure from that most nonprofits must file with the IRS every year; B.they don't know how functional allocations were made (between fundraising, management, and program expenditures); C.they don't discuss their auditor's management letter.

53. 2. Failing to monitor key indicators, allowing the organization to drift into financial trouble. Both the management and the board need to make sure revenue and expenses match up - - tracking trends in income, debt-to asset ratios, and overspending in particular budget categories. When income is delayed or less than expected, a surprising number of executives are reluctant to tell the board. Instead, they hope things will turn around; meanwhile they defer paying outside obligations, including the IRS. If you are a board member there is nothing more frustrating than to discover your personal tax refund has been frozen pending satisfaction of an IRS claim against the charity you serve.

54. 3.Failing to pay sufficient attention to whether the organization's financial resources are being effectively spent on programs. What are the documented performance results of the major programs of the organization? Donors, the media, and recipients of services are all asking for documentation of outcomes, not just the number of clients served or total dollars spent. Program evaluations? Where are they?

55. 4.Being too trusting of staff who handle money. While the people in the office with the blank checks would not have been hired if they were not judged to be trustworthy, prudence requires that boards not only trust but verify. The embarrassing number of embezzlement cases in nonprofits is due to inadequate internal controls (separation of functions, limits on check writing authority, etc.), and some boards are now forming financial control committees.

56. 5.Lacking strong external checks on financial reporting. Organizations with budgets above $750,000 per year should have a certified audit, but many do not (only three states require registered charities to have an audit).

57. 6.Emphasizing executive compensation at the expense of other employees. Board members are frequently grateful for the hard work of senior management and show it by paying competitive salaries. The focus on executive pay to the neglect of organization-wide compensation policy results in steeper hierarchies of pay, with stagnant income from the middle of the organization down, decreased morale, and high turnover among front-line workers.

58. 7.Failing to "bid out" the sale of organizational assets. The most pressing examples of uncompetitive sales are in the current wave of nonprofit hospital conversions, but the same issues have risen in sales of buildings, camps and religious television stations, which often go to a single bidder. Has the board independently ascertained the selling price to ensure its fairness?

59. 8.Failing to scrutinize outside service contracts sufficiently. Is the organization getting the best deal possible from its fundraising, direct mail, or telemarketing consultants? Most outside contracts should be re-bid at least once every three years.

60. 9.Spending funds restricted by time or purpose. Sometimes board reviewing financial statements allow special project dollars, capital, and even endowment funds to be spent on general expenses as a "temporary" internal fix for cash flow problems. Such temporary uses of restricted funds are technically a violation of law in every state, but the real problem is that many organizations dig themselves into permanent holes.

61. 10.Mixing charitable and business interests. Board conflicts of interest are on the rise as nonprofits increasingly seek out "win-win" partnerships. The dilemma is that this is an intentionally tangled web. Since many board members are sought for their connections, it is not surprising that some board members leverage deals at both ends of the relationship. Staying on top of organizational finances is more and more important, especially in light of increased use of the Internet as an accountability tool for the nonprofit sector. Most organizations' IRS Form 990 is available on the Internet, allowing the whole world to look over and organization's shoulder and second-guess any financial decision of the board.

62. End of Part I. Part II Begins with a walk through the VASSP Financial Policies and Procedures Manual