Don’t Be the Next Scandal: Why The Right People, Processes and Tools, and the Board Matter!
According to a Boston Globe story, a local nonprofit organization is being asked to repay to the state almost $350,000 for improper use of state funds. Included in the allegation were payments made to the executive director for personal expenses—cars, care for his family and other everyday personal expenditures. In April, an investigation uncovered a New York drug and alcohol addiction treatment center employee buying Walmart gift cards with center funds and using them for alcohol, cigarettes and other items. A Washington DC nonprofit can’t account for more than $25 million dollars.
Even smaller organizations aren’t immune; scandals aren’t confined to the larger nonprofits. An Illinois woman was convicted, and her 80-year-old mother has also been charged, with embezzling almost $300,000 from their local chapter of the Order of the Eastern Star. The money, which far exceeded the group’s annual budget, had been a bequest.
These and other scandals erode the public’s trust in nonprofits. Even if there is no wrongdoing in your organization, the perception of wrongdoing or conflict of interest can impact your organization’s ability to raise funds and carry out your mission. Closing the proverbial barn door after the horse has bolted (i.e. trying to explain away the issue) just doesn’t work. The damage is done.
Here are three primary areas to address if you want to avoid any hint of impropriety that might bring the reporters to your door.
The Right People: The first step is always hiring the right people. In our article, “The 7 Sins of Ineffective Finance and Accounting Teams”, we talk about the importance of hiring staffers with the appropriate level of technical accounting skills. Areas where relative weakness exists for many nonprofits include restricted fund accounting, cost allocation, and state and federal contract compliance
The Right Processes: Over time, most organizations evolve in some way, developing their own unique style of doing things, and sometimes outgrowing policies and procedures that might be meant for a smaller organization. Our article on “Keeping Your Nonprofit Organization Financially Fit” includes a list of warning signs to help identify when the organization has drifted too far away from industry approved best practices.
The Right Tools: Today’s finance and accounting teams rely heavily on technology to deliver timely and accurate reports and financial data used in the decision-making process. Our article “Avoiding Workarounds: Setting up Financial Systems With an Eye Toward the Future” provides you with four important steps to appropriately assess your system requirements and choose the appropriate system for your organization’s needs.
From an operational point of view, these three things cover much of the territory where things go wrong.
The Board is the Real Last Line of Defense
Boards have both a moral and legal obligation to lead by example, to act in a manner that is responsible and is not driven by outside interests, and to provide long term guidance and oversight. To ensure that management and staff know what is expected of them, the board must clearly communicate the organizations’ mission.
Establishing Internal Controls
It is also the responsibility of the board to implement proper internal controls and ensure that they are adhered to across the organization.
Here are sample revenue and AR questions you can ask your finance and accounting team to help you determine if you have the proper internal controls in place:
1. Are the Organization's billing and collection policies reviewed and understood by board members/key staff?
2. What is the process for setting annual dues and rates for other services provided?
3. What is the process to ensure billing for every billable event? Accurate pricing on each bill?
4. What is the process to ensure the complete recording of each transaction?
5. Is billing for dues that vary from standard pricing properly authorized and by whom? How is it tracked for accurate billing?
6. Is income properly tracked and classified (dues/fees, fundraising, special events. contributions, endowment, interest, etc.) What control is in place to ensure proper classification?
7. Is income tracked by cost center (dept) and code # (project)? Explain.
8. What controls exist to ensure revenue is matched to department and project expenses?
9. Is there a need for income to be tracked by debt-financed vs. non debt-financed category? If so, how is the proper accounting assured?
10. Describe the month end cut off procedures for revenue, cash receipts and AR?
11. How are non-cash contributions for goods/services accounted for (if any)?
12. Describe the Organization's endowment grant; rules, restrictions, regulations, reporting requirements?