section header graphic
Search the Health Fund website for:

March 23, 2015 - Kim Moore [see other posts]

Minding the Money

Who's Minding the Money?

In a nonprofit organization, there are three correct answers: staff members, external auditor/reviewer and governing board. Each one of these three players exercises a critical role in making sure that money is properly received, spent and accounted for. A weakness or laxity in any one of the three is a reason for special concern and action by the other two.

Four times in my 28 years at the Health Ministry Fund I have experienced the failure of this system to the point that the very life of an organization is threatened. In only one of those four situations was actual misappropriation of funds by an insider a significant part of the resulting financial quagmire. In three of those situations, the facts are so similar as to almost create a roadmap for financial ruin. Those factors were:

  • Financial problems resulting from regular operations were not shared with the board. Internal accounting reports were not provided to the board at all, were incomplete or were creatively developed.
  • An executive director (and in one case, a compliant chief financial officer) attempted to deal with the financial problem through extra-budgetary tactics (not paying invoices on a current basis, excessive overdrafts, lines of credit, etc.). There were insufficient adjustments to the operation of the organization to develop a balanced budget and spending levels were mostly sustained through these techniques.
  • The failure to pay federal and state withholding taxes was used as a principal method of handling a significant share of the financial problems. 1
  • External reviews or audits were never arranged or were delayed for non-reasons and the board accepted this situation for many months (12-24). Reports to funding sources (including United Methodist Health Ministry Fund) were delayed, incomplete or erroneous.
  • Long-term executive directors who had the full confidence of the board did these deeds.

In the three cases not involving significant outright misappropriation for personal uses, the amount of indebtedness created by these tactics amounted to almost a full year of organizational revenue. Two of the four organizations survived to carry on their charitable missions. One organization ceased operations immediately upon discovery.

You may have noticed in the bullets above that funders such as UMHMF were hoodwinked as well. In some cases, we settled for less than full compliance with our grant conditions; especially the requirement of an audit or external review. In three of the cases, we do not believe that any of our money was actually misspent, and we had enough evidence on that score to be too flexible (as it turned out) in enforcing reporting requirement or questioning beyond the executive director. After one of these experiences, we tightened up our "tickler system" on audits and reviews. We materially assisted three of these organizations in attempted operational recoveries and had every opportunity to learn our own oversight lessons.

The lessons I would like to draw for readers, however, relate to board conduct. The boards, in all these cases, were simply missing in action at key points. The culture of the board was at the heart of the matter. Board members should never cease to be questioners. They should never trust their executive leadership to the point of inattention. Boards must always have in place procedures to keep the finances of the organization within their direct knowledge. 2 Some board members must be engaged with the numbers on a current basis, particularly in small-staffed organizations. Here are a few ideas for board members of nonprofits to be successful in minding the money:

1. Have an external review, preferably an audit, at annual intervals. There are NO excuses for delay in the timely production of that audit/review. If executive staff claims there are reasons for the delay, the board chair or treasurer should directly discuss the delay with the auditors and determine how to move forward the engagement.

2. Ask questions of any potentially unusual item disclosed by the internally prepared (on a regular basis, of course) financial statements. Why is the amount of withholding not 7.65% of the salaries paid? Why was this line item 20% larger or smaller than last year? Why is our bottom line ratably different now than at this time last year? When the board is informed of a change in revenue (loss of a major grant, reduced reimbursements, etc.), the board should ask how the budget will be adjusted to account for that (specifics are desired) and then follow up for the next 3-6 months on the ways this has been implemented, while checking income statements for the clear evidence.

3. Visit with the auditors without staff present NO MATTER if the audit has not disclosed any problems or you have the most trustworthy staff on the planet. The board or its duly created audit committee should review the audit with the auditors, and board members should ask questions about any internal control issues or opportunities for strengthening controls in the management letter.

4. Keep the board treasurer engaged with the organization's actual finances. In small to medium-sized organizations, this could mean that bank statements, general ledgers and balance sheets/income statements are routed to the treasurer for review on a monthly basis. The treasurer should ask questions from time to time just to keep staff aware they are being watched.

5. Determine special approval procedures for expenses of the executive director. Many boards require the board chair or a board committee to approve all executive director expenses before they are paid.

6. Insist bookkeeping records be maintained on organizational premises versus kept at home on a home computer by the executive director or other financial staff. If there are not organizational premises, arrange for financial records to be maintained at a secure, business location such as a board member's office, CPA's office, lawyer's office, etc. Insist on access to those records upon request of the chair or treasurer of the board. Exercise that access from time to time in small and medium-sized organizations.

7. In larger nonprofits where there is sophisticated financial staff, create a clear path for that staff to report to the board chair or treasurer any suspected financial irregularities involving the CEO or other high-level staff member whose shenanigans may not be reported through the regular administrative staff.

If you are a member of a nonprofit board—well-run, long-established, having a great CEO of unblemished reputation, it is wise to remember that you are still expected to "mind the money."

Footnote 1:
I am not attempting to provide any discussion of legal liability of board members in these situations. I must, however, note that individual liability of responsible board members for unpaid federal and state withholding taxes can occur in spite of state charitable volunteer laws.

Footnote 2:
The practice of placing most financial reports on the consent agenda of the full board should be modified from time to time so that discussion of organizational finances with full and well-utilized opportunities for questions by board members can occur. At a minimum, a board should have full financial reviews twice a year including the development of the budget and receipt of the audit. The board committee with oversight of the finances should be doing full reviews of internally-prepared income statements on a monthly basis (with questions). Operate on the difficult, but important, basis that no board member's question is stupid (some will be, but that is the price we pay for good governance).