Money Matters for Nonprofits: How Board Members Can Harness the Power of Financial Statements by Understanding Basic Accounting
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About this ebook
A CPA with nearly twenty years of experience in the accounting profession, Melisa Galasso is the founder and CEO of Galasso Learning Solutions LLC. A natural teacher, Melisa designs and facilitates accounting and auditing courses, including not-for-profit accounting. In Money Matters for Nonprofits, Melisa makes complex topics easy to understand with lots of examples and clear explanations of how financial statements work. With this resource at your fingertips, you as a board member will feel equipped to better advise your nonprofit and make an even greater difference in the world.
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Money Matters for Nonprofits - Melisa F. Galasso, CPA
CHAPTER 1
GOVERNANCE
You likely wouldn’t consider joining a nonprofit board (or reading this book) if you weren’t passionate about your organization’s mission. However, beyond advocating for a worthy mission, nonprofit boards assume many legal, fiduciary, and oversight responsibilities that can be difficult to understand. It is important to ask yourself a number of questions to ensure a good fit and to ensure a full understanding of the commitment. One question recommended by BoardSource, an organization that focuses on providing support to nonprofit organizations, is: Do you understand the roles and responsibilities of being a board member?
¹
FIDUCIARY RESPONSIBILITIES
Most of the legal responsibilities of board members come from common law (as opposed to statutory law). The Model Nonprofit Corporation Act is drafted and updated by the American Bar Association’s Nonprofit Organizations Committee of the Business Law Section. The model is used by states and either adopted fully or used as the base for state law. The act grants each attorney general and secretary of state certain oversight functions for nonprofits. Chapter 8, paragraph 801, Requirement for and Functions of Board of Directors,
states, A nonprofit corporation must have a board of directors.
In addition, (1) all corporate powers must be exercised by or under the authority of the board of directors of the nonprofit corporation; and (2) the activities and affairs of the corporation must be managed by or under the direction, and subject to the oversight, of its board of directors.
²
Board members act as fiduciaries of the nonprofit, which means they’re responsible for the mission and resources of the organization. States set requirements for board conduct. Boards are legally responsible for duty of care, duty of loyalty, and duty of obedience.
•Duty of care requires staying informed about the organization, participating in meetings, and ensuring the mission is properly carried out in compliance with laws, regulations, and statutes. This includes making informed decisions when voting, reviewing, and updating policies, and reviewing financial information.
•Duty of loyalty ensures that members of the board always put the interests of the nonprofit before their own. Conflict-of-interest policies can help ensure that board members do not find themselves in a position where personal interests and professional duties or responsibilities clash by requiring them to disclose any potential conflicts to the board for approval.
•Duty of obedience requires board members to follow relevant state, federal, and local laws and regulations and ensure the mission is carried out. This includes ensuring appropriate returns are filed and deciding what is within the organization’s mission. Boards should have policies that cover topics like board recruitment, composition, attendance, and quorums. Board evaluations help ensure members are meeting their fiduciary responsibilities.
BOARD RESPONSIBILITIES
BoardSource has identified ten basic responsibilities for board members, falling under three broad roles—establishing organizational identity, ensuring resources, and providing oversight.³
Establishing organizational identity includes
•ensuring effective planning
•determining the mission and purposes, and advocating for them
Ensuring resources includes
•selecting the chief executive
•ensuring adequate financial resources
•building a competent board
•enhancing the organization’s public standing
Providing oversight includes
•supporting and evaluating the chief executive
•monitoring and strengthening programs and services
•protecting assets and providing financial oversight
•ensuring legal and ethical integrity
OVERSIGHT RESPONSIBILITIES
Oversight is one of the main responsibilities of a nonprofit board. Independent Sector, a membership organization that focuses on nonprofits and provides policy leadership best practices, has identified thirty-three principles that help nonprofits evaluate their oversight.⁴ The principles fall into four main areas—legal compliance and public disclosure, effective governance, strong financial oversight, and responsible fundraising.
Legal compliance focuses on understanding laws and regulations impacting nonprofits. In the United States, the IRS makes determinations about tax-exempt status. Nonprofits (with the exception of churches and other houses of worship) are required to file annual informational returns to the IRS. Noncompliance can lead to a nonprofit losing its tax-exempt status. The board of a nonprofit is responsible for ensuring that the proper returns are accurate and submitted in a timely manner. Nonprofits are also subject to state laws that can bring liability to board members if not followed.
TERMINOLOGY
Note: A quick point on terms. The term nonprofit is a legal concept. Tax exempt is a tax concept, and not-for-profit is an accounting term.
While this book is focused on nonprofit organizations, the term nonprofit is sometimes used interchangeably with tax exempt. However, not all nonprofits are tax-exempt organizations, and not all nonprofits are charitable organizations. The National Football League for a long time was a tax-exempt organization! Charitable organizations, entities whose purpose is to achieve a benevolent mission and where profit stays within the organization, are typically 501c3s per the Internal Revenue Code. Other nonprofit organizations can be membership organizations (like golf clubs or alumni associations), and they fall under 501c7 in the tax code.
There are differences between accounting standards for nonprofits (ASC 958) and tax requirements. For accounting purposes, the Financial Accounting Standards Board (FASB) uses the term not-for-profit, which is defined as "an entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity:
contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return;
operating purposes other than to provide goods or services at a profit; and
absence of ownership interests like those of business entities."⁵
Entities that meet these criteria are the types of organizations that can apply the accounting concepts addressed in this book. Tax status is not a consideration for determining appropriate financial reporting.
For ease of use, this book will use the term nonprofit to describe the organization.
The legal compliance principles also focus on best practices in policies. Nonprofits should have well-documented policies that the board approves. Policies around whistleblowing, conflicts of interest, data retention, social media, and ethics are important and drive the tone at the top of the organization. The board should regularly review and update policies and stay alert for new policies that may be needed. COVID-19 provided opportunities for nonprofits to consider policies related to remote work and telecommuting, cybersecurity, and staff leave.
Donor expectations can also have a big impact on the priorities and policy setting of the board. As societal trends evolve, issues like diversity, equity, and inclusion along with environmental, social, and governance disclosures can impact the policies of a board. Pressures to ensure representation of women and minorities encourage nonprofits to review their selection criteria and outreach to ensure diversity of thought. Sustainability and the environment have become more pressing issues. Donors are looking for disclosures about these topics even though they are not currently mandated by any sources. Ninety percent of S&P 500 companies published Sustainability Reports in 2019 compared to just 20 percent in 2011.⁶ While the S&P 500 is composed of large publicly traded companies, nonprofits are trending in this direction as well. A study by Ott, Wang, and Bortree found that few nonprofits in the sample provided sustainability content; however, nearly all universities . . . had a designated sustainability landing page on their websites.
⁷ As societal focuses change, boards will need to ensure they don’t lose donors for appearing tone deaf or being late to the