When the Sarbanes-Oxley Act was signed into law on July 30, 2002, it overhauled corporate governance practices for publicly traded companies, with a significant emphasis on the role of the board of directors. In the years following, many of the governance policies and practices mandated for public companies were also adopted by nonprofit organizations as their board members began to question their own responsibility for the governance and oversight of their organizations. In 2005, according to a GuideStar survey of nonprofit organizations, 61 percent of of the participants said their organization had made changes in response to Sarbanes-Oxley.

Nonprofit boards had begun to change their focus, but not enough to stop the continued reports of fraud, misuse of assets, and excessive compensation for top executives.  The result was increased public scrutiny, new legislation, and the most significant changes to Form 990 in over 25 years. Those changes effectively required the board of directors to take responsibility for the oversight and governance of their organizations.

Although the fundamental principles of governance have not changed, governance practices have been completely redefined as boards have become more proactive in protecting the mission of their organizations by ensuring compliance with legal, financial, and ethical standards, and monitoring the progress and overall performance of their organizations. Time will tell if the “new” governance paradigm will protect nonprofit organizations from even more burdensome regulation that will divert already limited resources from the mission.

When there are only a few staff in an organization, it is very difficult to obtain the appropriate level of segregating duties.

In January 2010, Carl Ho, CPA posted an article on Blue Avocado (http://www.blueavocado.org) titled “Five Internal Controls for the Very Small Nonprofit” that gives some insight as to what the most important controls are for small organizations. The most important controls relate to checks and balances. Establishing a “tone at the top” so that policies are in place and all employees including management follow them. Other importants considerations include clearly defined responsibilities, locking up checks, using protected passwords on computers, having two people count cash together, reconciling bank statements timely, review of reconciliations or bank statements by someone other than the bookkeeper or preparer, requiring two signatures on checks, and not allowing the bookkeeper to be a check signer. Even with these procedures in place, fraud can occur if there is collusion or if management circumvents the policies or controls. For the full article visit, http://www.blueavocado.org/content/five-internal-controls-very-small-nonprofit.

Governance plays a significant part in the control environment. Listed below are a few links from the IRS website regarding governance practices for non-profit organizations.

Governance and Tax-Exempt Organizations – Examination Materials

http://www.irs.gov/charities/article/0,,id=216068,00.html

http://www.irs.gov/pub/irs-tege/governance_check_sheet.pdf

Governance of Charitable Organizations and Related Topics

http://www.irs.gov/charities/article/0,,id=178221,00.html

Case law has defined the responsibilities of tax-exempt boards. Normally referred to as the 3D’s (duty of care, duty of loyalty and duty of obedience), the board’s actions primarily are centered on organizational oversight and policy setting. The chief executive is responsbility for managing the organization’s operations and resources. If the board oversteps and becomes too involved in operations, the organization’s executive management may become stiffled or feel threatened. If the chief executive does not openly communicate critical issues to the board, the board becomes apprehensive that resources and mission may be at risk.

So what is the solution?

Each party (board and chief executive) must understand their missional roles and responsibilities. Governance is the exercise and assignment of power and authority. Boards have a unique opportunity to partner with the chief executive in missional objectives.

Think about the following if, then statements: Read the rest of this entry »

Governance, as defined by Webster’s dictionary, comes from the noun word, government. Government, in it’s purest form, is a political function of policy making, distinguished from the administration of policy decisions.

Since the summer of 2004, tax-exempt entities have experienced continued pressure from regulatory and legislative agencies. Consider the following important dates:

1. Spring 2005 – Panel on the Nonprofit Sector issues interim report on charitable reform measures.
2. June 2006 – IRS releases new Form 1023 with new governance questions.
3. August 2006 – Pension Protection Act of 2006 signed into law.
4. February 2007 – IRS publishes a discussion draft of good governance policies
5. Fall 2007 – Commissioner of Exempt Organizations begins giving speeches on governance issues.
6. December 2007 – Redesigned 990 released.
7. December 2008 – Form 990 (core form and related schedules) finalyzed.
8. 2009 – IRS pledges to release a checklist for its agents to use during audits to determine how governance relates to tax compliance.

Why is the IRS interested in governance? The first and prominent answer, according to Steven T. Miller, IRS Comission, Tax Exempt and Government Entities,  a well-governed organization is more likely to be compliant with the tax law, while poor governance can easily lead to trouble. Good governance also allows organizations to self-identify and self-resolve problems. Governance practices influence whether an organization is operated to further exempt purposes, and whether the organization serves public, rather than private, interests.  Good or bad governance dictates whether the organization’s executives are compensated fairly or excessively. It influences whether the organization makes informed and fair decisions regarding its investments or its fundraising practices, or whether it allows others to take unfair advantage.

According to Miller, Read the rest of this entry »

Today RCO is leading a governance conference provided to tax-exempt organizations in the Dallas-FW community and across the state. Nearly 70 tax-exempt participants and specialist will engage in governance topics. The pre-session workshop is designed to identify exceptional board qualities. The reverse will also be examined, what are the dysfunctional and passive qualities of boards.

During the luncheon session we will review the three different modes of governance, fiduciary, strategic and generative. What is the generative mode? Generative thinking is performed almost everyday, external to the board. So how does the board begin generative thought? Governance as Leadership, published by BoardSource provides examples of generative thinking and governance.

The afternoon session will be led by a panel of specialist, including Benton Clark, Christi Stinson, Frank Sommerville and Cory Halliburton. They will be reviewing principles of good and ethical governance, fiduciary responsibilities including conflict of interest and risks of certain ministries.

During the next month we will discuss the highlights of the conference.

In late December the IRS announced the release of the final 2008 Form 990, Return of Organization Exempt From Income Tax.

The redesigned 990 consists of an 11-part core form required for all organizations that file a 990, with several additional schedules to be completed based on certain requirements.  Some of the most significant changes to the new 990 are the required disclosures related to governance and compensation of officers, directors and key employees.

Because of the new reporting requirements, many organizations will need to reevaluate their overall governance policies and procedures, as well as the composition and responsibilities of the board of directors.  In some cases these changes will be significant and will require considerable time and resources to implement. 

Through the revised form, the IRS is effectively imposing a new standard of governance on nonprofit organizations.  Don’t wait until it’s time to file your 990 to consider how these changes will affect your organization. For more information see the IRS website and one of our previous posts.

According to John Maxwell’s book, 21 Indispensable Qualities of a Leader, effective leaders know they must have focus to succeed. The keys are priorities and concentration. A leader who knows his priorities but lacks concentration knows what to do but never gets it done. If he has concentration but no priorities, he has excellence without progress. But when he harnesses both he has the potential to achieve great things.
Focus 70% on strengths – identify 3-4 things you do well and spend 70% of your time on those things.
Focus 25% on new things – what do you need to get to the next level in your main area of strength?
Focus 5% on areas of weakness -Identify 3-4 things your job requires but you don’t do well, delegate. How do you focus?