You are accountable.

In the wake of a global economic meltdown attributed to financial greed and irresponsibility, regulators worldwide are focusing on accountability as the means to cleaning up the mess, and preventing it from recurring.

Board members of all organizations – nonprofits as well as corporations – are now held to a higher degree of accountability than ever before. Although directors can delegate many financial matters to an executive director or finance or audit committee, they are personally accountable to the organization’s stakeholders. When it comes to ensuring that a nonprofit is financially secure, the buck now stops with every member of its board.

Whether you are considering a nonprofit board position or you are currently serving as a director, it’s vital to be aware of your financial responsibilities and how you can best meet them. The risks today are otherwise too high. When it comes to fiscal accountability, for example, more than 100 federal and provincial statutes can impose personal liability on directors if an organization fails to pay wages to employees or taxes to the government. Directors could also face liability if the organization does not fulfill its contractual obligations with employees or contractors, or if board members behave negligently regarding how they govern, manage funds, or make decisions impacting stakeholders.

Of course, every nonprofit needs conscientious, capable and committed volunteer directors. Thus, most organizations indemnify directors for liabilities they might incur while carrying out their duties and carry directors’ and officers’ liability insurance to cover any costs should the nonprofit be found liable for damages to another party. This helps to ensure that board members can safely serve their roles.

When it comes to overseeing the effective financial management of a nonprofit organization, the following are key areas of responsibility for board members, as well as suggestions regarding how to prepare for this role.

Safeguard the organization’s mission. The starting point of a board member’s role is the organization’s mission. It is the responsibility of the board of directors to define this mission and ensure that it is carried out. Typically, this is part of strategic planning, whereby the board and management review the organization’s purpose, goals, priorities, fundraising, programs and activities. This big picture enables directors to see where the organization currently stands, where it needs to go, and how it can get there.

Be responsible to stakeholders. The board of directors is also responsible to the nonprofit organization’s stakeholders. Donors, for example, generally expect information regarding how a nonprofit uses their funds. Members may want information regarding the organization’s performance. Clients will expect to know the cost of services. Volunteers and employees likely want to know how their time and efforts add value to the organization. In order to maintain successful relationships with these constituents, board members must ensure they receive the appropriate financial information.

Develop and monitor financial policies and controls. Prudent financial management requires comprehensive financial policies, procedures and controls. To ensure responsible financial management and minimize the risk of errors or fraud, these must clarify roles, responsibilities, authority, approvals and the protection of assets. The board should regularly review these policies and update them as internal and external changes occur.

Ensure sufficient resources to carry out the mission. It is also the responsibility of the board to ensure that the organization has sufficient resources – personal contributions, fundraising, people or other assets – to achieve its mission.

Effectively manage resources. The board is expected to protect the organization’s assets, ensure that funds are used appropriately and properly manage income and investments. Annual budgeting is integral to this. All members of the board, not just the executive or finance committee, should be involved in reviewing and approving the annual operating budget.

Monitor the performance of the organization. The same rule applies to monitoring the budget. The board should review the budget each month to ensure that revenue, expenses and investments are meeting expectations. If not, it is the board’s responsibility to determine what adjustments may be necessary.

Directors should hold staff accountable for providing timely and accurate month-end reports. These should include comparisons of actual and budgeted amounts for the current period, as well as for the same time period in the previous year, along with an explanation of any significant issues.

Every quarter, the board can address the bigger picture by reviewing and discussing the balance sheet (overview of assets and liabilities), income statement (change in net assets over time) and cash flow statement (inflow and outflow of cash). These documents enable the board to monitor the progress of the budget and to identify trends. Directors should understand these financial documents, ask relevant questions, and challenge assumptions when warranted.

Approve an independent annual audit or financial review. Large nonprofits typically undergo an annual audit of financial records by an independent accounting firm. For smaller nonprofits, an independent financial review is equally important to sustain the integrity of financial reporting. Often, the annual audit process and communication with the auditor is delegated to the executive director or audit committee. That being said, every board member has a personal obligation for financial oversight and should understand the financial results and any issues arising from the audit or review.

Ensure financial obligations are met. To protect against liability, directors need to ensure the organization meets its financial obligations. These include timely payment of income taxes, payroll taxes and other government remittances such as GST and PST. Meeting obligations also involves ensuring that the organization is complying with the terms of grants and contracts and that those donor contributions are used as they were intended.

Obviously, nonprofit directors bear broad responsibilities for the financial stewardship of the organizations they serve. Even when a nonprofit has an experienced executive, audit or finance committee, the other board members should never relinquish responsibility for fiscal oversight. This means that every nonprofit and every board member needs to take some responsibility for ensuring that all directors are financially literate.

• Nonprofits should seek board members who demonstrate an interest in the financial health of the organization and who have an understanding of financial information, or who are enthusiastic about learning.
• Directors should determine whether a nonprofit carries directors’ and officers’ liability insurance and what is covered.
• Nonprofits should provide a board orientation program that includes equipping new members with the organization’s strategic plan and complete financial information.
• Prospective board members should feel comfortable with the financial health of the nonprofit before committing to a directorship.
• Nonprofits should be prepared to build the financial competence of new board members – through briefings, workshops, mentoring or reference materials – regarding how to read and understand budgets, balance sheets, income statements and cash flow statements.
• Directors should review all materials provided prior to board meetings and be prepared to discuss and debate financial reports and issues.

 

As a director of a nonprofit, you are personally responsible for the organization you serve and accountable to all of its stakeholders. You should, therefore, be fully aware of your responsibilities and obligations, especially with respect to the financial integrity of the enterprise. At the same time, you have an opportunity to take on a vital role and learn valuable financial skills that you can take with you to other organizations and jobs. Ultimately, when you understand the financial consequences of decisions, you make better decisions.

Bob McMahon, CA, is a partner of BDO Dunwoody LLP. He provides auditing, accounting and advisory services to nonprofit, private and public organizations. You can reach Bob at (905) 270-7700 or bmcmahon@bdo.ca.