Balancing the Mission Checkbook

Since I am supposedly an expert in nonprofit financial matters, I shouldn’t be surprised that I am frequently invited to join nonprofit boards. I am surprised, though, when I’m recruited for the board of a nonprofit that I have no knowledge of, with no past relationship, and in a field of service in which I’ve never shown a particular interest. What do they think I will bring to this board? The honest answer is that I will be able to read their financial statements. I agree that financial oversight is an essential board role, and one that boards do not always perform well. For evidence of that, just read any of the recent stories about fraud, misuse of funds or insider transactions. I also know that it’s challenging to recruit board members who understand financial reports, budgets, cash flow, and audits. But is a specific skill – financial knowledge – enough of a reason by itself to invite someone to join the board? As the invitee, I would say no. I have some questions that I ask when I’m recruited for a board. First, of course, is whether I believe that the work the organization does, and how they go about it, is exciting and important to me. I’ve been asked to serve on boards of social service, health care, performing arts, literary arts, visual arts, community development, faith-based, education, and youth service nonprofits. I care deeply about some of these issues and not so much about others. Uninterested board members are often unengaged board members. My next question is, “why me?” The fact that I can read and understand financial reports is not a good enough answer.

The starting point of board recruiting needs to be a broader understanding of what kind of governance and leadership the organization needs, and how the board as a whole and as individual members can deliver on those needs. A common tool for board recruitment is a matrix that lists the skills and other attributes that are needed on the board on one side and current board members across the top. Fill in the boxes and, voila, you see the holes that need to be filled. Too often, though, this results in a board from central casting – an attorney, a CPA or banker, a business person with a marketing background, someone who (it is hoped) has access to potential donors, and then one or two people with long histories with the organization. All of these board members have skills and abilities but don’t always add up to become a great governance and leadership board. How can you get the board you need? First, open your mind beyond technical skills about what you need from individual board members. I’ve seen grids that list not only the specific skills like marketing, fundraising, financial, etc. but also personal qualities like “boat rocker” and “challenges status quo”. The list of skills and attributes needs to change over time, too, and project into the future – aligned with the strategic plan – what the organization will need to get it where it wants to go. I think that this enhanced grid can start to get closer to the broader needs. Second, think about the board as a group, not as a collection of individuals. Think about what styles, attributes, and skills will work together to create the best board team. Third, consider how you actually develop a list of nominees. Too often, a spontaneous and short brainstorming session evolves into a definitive list. The board, or a nominating committee, thinks of names of people they know of – off the top of their heads – and that becomes the list. I think that this is where my name tends to come up. Better to take some time to research and find people who will be the best match with the organization’s work, the skills and leadership attributes needed, and the dynamics of the group. Ideally this is an ongoing process so that you always have a list of potential board candidates. While this post is on the topic of recruiting new board members, many of the same ideas can apply to sitting board members through an assessment process. I have found some very practical and concise thoughts about board assessments on the Starboard blog by Jeff Wahlstrom like this excerpt from a recent entry - Board member, assess thyself.

• Do I know what is expected of me?
• Do I have what it takes?
• Do I have the necessary tools, information and instruction to succeed?
• Is what I’m doing on the board making a meaningful difference?
• Is there an opportunity here to make better use of my abilities/skills/experience/knowledge?
• Am I enjoying the experience of serving on the board?
• What would make my board experience even better?
• And (most importantly) what goals should I set for myself and my board experience?

If you haven’t, you should call them soon and ask about SAS 112, a recent change in auditing standards that will affect audits of nonprofits. Because the new standard was effective in December 2006 we are just beginning to see audit reports using the new standards. SAS 112 establishes new definitions and standards for Communicating Internal Control Related Matters Identified in an Audit. Auditors have always considered the quality and sufficiency of internal controls as a component of the audit. If weaknesses in internal controls are observed, the auditors submit a management letter to the board describing the weaknesses and recommending further attention to these controls. We often joke that the “Segregation of Duties” comment is printed on the letterhead of the audit firms since so many nonprofits receive management letters with this finding. We all understand that it is very difficult to properly segregate all financial duties with a small staff. The new auditing standard could greatly increase the number of internal control weaknesses identified and reported – and cause concern and strong responses by nonprofit boards. The new standards do three things: provide new definitions and terminology for internal control weaknesses; allow the auditors less discretion in identifying weaknesses as significant; and require that auditors apply more complex standards that consider combinations of weaknesses, quantitative and qualitative factors. This article from the AICPA includes links to the SAS 112 document for a thorough review. Enough of the technical – what does this mean for your nonprofits?

The likelihood that control deficiencies will be identified and reported is probably higher. The auditor simply has to consider a much wider range of factors and apply a new and higher standard.

According to accounting firm PricewaterhouseCoopers, “we believe that the new definitions will lower the bar such that more control deficiencies will be considered severe.”

Even for the management letters with the same findings as previous years, the new terminology may cause concern. The term “reportable condition” is replaced with “significant deficiency”. More nonprofits will receive reports of control deficiencies related to their capacity to apply generally accepted accounting principles to financial transactions and financial reports. Think about your internal year-end financial reports. Do you correctly report the following information according to GAAP accounting rules: receipt and release of temporarily restricted funds, in-kind contributions, accrued expenses, and depreciation? If you have relied on your auditors to provide audit adjustments for these items, you should be prepared for a possible finding of a control deficiency. What should you do?

• Talk to your auditor before they come to start fieldwork about SAS 112 and how they will communicate with you during the audit.
• Next, communicate these new standards to your treasurer, finance committee and board of directors. The last thing you want is a surprise when the audit report is presented.
• Last, and most important, do what you can to improve your internal controls and quality of financial accounting. This is the ultimate purpose of the audit standards, and the goal for your nonprofit as a steward of your donor and supporters’ funds.

How should I answer the question, “How do I start a nonprofit?” I need an answer because it’s a question I hear pretty frequently. The common scenario is a phone call to our office looking for assistance to start a new nonprofit organization. (We are the Nonprofits Assistance Fund, after all.) The person on the line feels a personal call to action to address some need in their community – tutoring for kids, beds for the homeless, treatment for victims of abuse, and many other important and urgent issues. The question, though, shouldn’t be “how do I start a nonprofit”. The question should be, “How can I help to address this important community need?.” I try to help them step back a little and consider the real problem, not the conclusion they’ve already reached. If they can think about the bigger picture of how they can add their energy and talent to a community need, the options are vast. The answer is not always (in fact frequently is not) to incorporate another nonprofit organization. Time Magazine has a terrific article in the March 5, 2007 issue on this topic, “Rethinking Nonprofits”. Dan Kadlec boils the question of whether or not to start a new nonprofit organization down to three essential questions: Am I cut out for this?, Is my idea different?, and “Is a start-up necessary?”. The reality is that starting a new nonprofit corporation requires focusing the initial time, effort, and money on the start up rather than on the important community need. If someone is absolutely set on starting a new organization, we always send them to the Minnesota Council of Nonprofits web site for all the basic steps required. Note that the very first section of the “How to Start a Nonprofit” section at MCN is titled “Alternatives to Starting a New Nonprofit”. For a longer, more comprehensive resource about starting a new nonprofit, download the publication “Get Ready, Get Set” from the Center for Nonprofit Management in Los Angeles . The guide discusses how to conduct market research on the community need and available funding, and the legal and organizational steps. The Exempt Organization Division of the IRS also has several helpful publications and a new on-line training program.

The phone callers asking about starting a nonprofit tend to fall into categories. One group are of people who are deeply committed to helping their community and they just don’t know about the alternative ways to get involved. A second group are people who are ultimately trying to create a job for themselves and they believe the myth that there are “millions of dollars in grants available for you today!.” I don’t have much patience for them. The last group are those who have already started an informal program or project and want to find a way to get some money or help to continue or survive. These calls are the most complicated and the toughest to help. I can only hope that they have put some effort into the basic research and needs review as described in Dan Kadlec’s article. Otherwise they will confront the harsh reality of funding, boards, and the steep learning curve of a start up.