Simple Steps to Achieving Greater Accountability and Stewardship

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1 FAQ Simple Steps to Achieving Greater Accountability and Stewardship Simple Steps to Achieving Greater Accountability and Stewardship Frequently Asked Questions 1. Can you the presentation slides? Response: Go to You will find a link to the slides. 2. I am in the donor relations department and we depend on both our finance and program services departments to provide us with stewardship information including expenses, income, and services provided. There seems to be resistance from them to quickly share this information so we can share it with our donors. How do we effectively communicate our donor needs with them and help them understand the importance of sharing this information even if it needs to be pre-audited or preliminary information? Or are we wrong and we should wait for months years in some cases to get final, unchangeable numbers to share with our donors? What s better? Temporary stewardship that is provided quickly or final stewardship that takes a lot longer? Thomas McLaughlin Responds: Providing accurate information about expenses, income and services are basic expectations for any nonprofit organization. Here s a trend that you may have noticed; the bigger the gift, the higher the expectations for information about how that gift will be (or was) used. In the United States today we are re-learning the value of transparency in financial matters. That puts even more pressure on the finance department to produce timely, accurate information. Sorry, but there aren t many other ways to do it. But here s a possibility to consider: you may not be alone. Financial operations in nonprofit organizations are often understaffed, under-resourced, and underpowered. If you suspect that your finance department is underperforming, check out my book Streetsmart Financial Basics for Nonprofit Managers (John Wiley & Sons) for tips on how to gauge their effectiveness and what to do about it. 3. Do you feel money should be invested in ethical training for staff? Thomas McLaughlin Responds: This sounds like an invitation to settle an internal quarrel, so let s put it this way. Should staff be expected to act ethically and should they be supported in doing so? Absolutely. Should an organization spend money to get this result? That s up to each organization. But consider this: people in an organization take their cues from the leadership. The tone for ethical behavior can only be set at the top, and it is rooted in the smallest of details. All the values statements and all the written materials that can be produced won t equal the power of leadership by example What do you think of the use of external fiscal agents to compliment controls? Thomas McLaughlin Responds: A lot depends on what the term fiscal agents means. Small nonprofits frequently use outside fiscal advisors to do certain routine tasks until such time

2 as they can afford to bring those tasks in-house. This is perfectly appropriate and indeed usually inevitable. The same idea might be used to supplement internal capacity. If the term includes board members, this too could be wise, if you can design a way to create a welldefined and modest task for a financially savvy board member that would have the effect of increasing your segregation of duties (such as requiring a second signature or having a board member do a discrete task such as reconciling a bank account this isn t optimal for a variety of reasons, but in a small organization one must be practical). But over-reliance on such external parties tends to weaken the organization s fiscal muscle and it gets flabby and ineffective. 5. When SOX mandates spill over to the nonprofit sector, will the religious sector be the last to be tapped for compliance, due to the separation of state and church? Thomas McLaughlin Responds: Most likely, if it s tapped at all. Interestingly, though, there is even a growing sense of the need for greater fiscal accountability in some religious organizations. In economic terms, many faith-based groups are essentially small businesses (in some cases really, really small businesses), and they are just as susceptible to fraud as any other small business. We have even worked with a group dedicated to bringing a higher level of stewardship to small churches. Many of the leaders of these organizations want to demonstrate fiscal accountability they just don t know how or have the resources to do so. 6. Can you recommend a reading list, articles, and URLs regarding accountability and stewardship for nonprofits? Thomas McLaughlin Responds: Check out the Grant Thornton Web site, as well as those of BoardSouce and Independent Sector. 7. What type of financial reporting do you recommend for the board of a very small nonprofit? Thomas McLaughlin Responds: For all nonprofits, there are five reports that are crucial to successful oversight: the balance sheet, the statement of revenue and expenses, an aged receivables list, cash flow projections, and some sort of report on the usage made of one s services. The first two and the fifth should regularly go to the board of directors. The cash flow should be available when indicated (such as when the balance sheet shows a cash shortage). 8. We are a $3.5M organization with no internal controls and a finance director that staff believes has a pretty pronounced gambling problem. She has missed work about 30%-50% of the time this year and has been found to be lying for many of those absences. Our Executive Director does not seem to be very concerned. Are we as staff overreacting? Thomas McLaughlin Responds: Absolutely not. You could have a real problem on your hands, and it should be investigated. Today would be a good day to start How do you activate a weak board? Thomas McLaughlin Responds: Try some education printed materials, URL s, in-person sessions. Next, bring in one or two highly energetic, compelling individuals. Hopefully they ll get the board moving. But, in truth, a board is weak because its individuals are

3 weak. In the end, you may need to replace most if not all of the directors. Your time is too valuable to waste handholding a weak board. By the way a weak board can actually be dangerous, as it tends to overlook or rationalize problems in order to avoid having to deal with them. And trying to re-work the board during a crisis is not a wise strategy. 10. We currently have a finance committee that handles the audit responsibilities. Is there a need to have a distinct, separate committee? Thomas McLaughlin Responds: A lot depends on the size of your organization. Although it would be desirable to have a separate committee (finance is responsible for some of the things that get audited) most small nonprofits will do well to have a separate finance committee of any kind. 11. What measures are recommended to assure that donor stated restrictions are being upheld? Thomas McLaughlin Responds: Sunshine is probably your strongest assurance. In a fundraising-dependent organization, it is in everyone s interest to maintain a high level of transparency. Often donor restrictions get overlooked because they weren t given a high level of importance and got lost in the shuffle. The CEO has the responsibility to see that donors wishes are respected. 12. Describe the recommended make up of the Audit Committee. Thomas McLaughlin Responds: Sarbanes Oxley requires publicly held companies to have at least one financially skilled person on a board. I don t know about you, but it s not reassuring to me that such massive companies only have to have one financial expert on their board. We should raise the bar in this sector. That said, be aware that true financial professionals, especially these days, are often very hardworking people and it may be difficult for them to spare the time to sit on your committee. So you may in fact be lucky to get even one real expert. But try to get people who have, if not credentials, at least the aptitude and patience to understand financial matters and who have a deep sense of personal responsibility for their role. 13. On what grounds would you tell Betty she is being terminated? Thomas McLaughlin Responds: Terminate her only when you have cause. What you have is a good reason to investigate. 14. What is your opinion on periodically rotating audit firms? Thomas McLaughlin Responds: The convention seems to be settling in at five years. The Senate Finance Committee staff white paper mentions that standard. But note that the real rotation is of the audit partner, not the audit firm. If the firm was what got rotated, the Big Four auditing firms would be constantly losing and gaining audit clients, and one partner firms would simply go out of that line of business altogether What do you do if Betty is the Executive Director? Thomas McLaughlin Responds: Same thing (see #17). The problems would be if you have no proof or if the board is unaware or resistant to the suggestion that the ED is engaged in illicit

4 activity. Do you have incontrovertible proof? If so, it needs to go to the board: a sympathetic board member may be a good conduit if the full board is not an option. If for whatever reason these options are not possible, you will need to go to the appropriate authorities. Remember, you re dealing with matters of law that transcend internal politics. Finally, if you have no proof... develop it. 16. Who should approve the CEO`s invoices? Thomas McLaughlin Responds: A person outside of the internal control system such as a board member, a contracted bookkeeper, etc. Second best would be another high-ranking manager, but it would be preferable to keep it outside of the chain of command. 17. Can you give an example of a control that might be delegated to a trustee or audit committee member? Thomas McLaughlin Responds: Reconciling the checkbook, signing checks, etc. Check out the internal control grid in Streetsmart Financial Basics for Nonprofit Managers. Also, consider having a trustee or audit committee member occasionally check out a random sample of things like the list of vendors or list of checks written. 18. How should the CFO handle dubious practices by the CEO? Thomas McLaughlin Responds: See #17 and #19. A sympathetic board member will be invaluable. Also, consider having an outside consultant review ALL business practices. That way, anything that gets flagged will be in the context of everyone s practices and it won t seem like a witch-hunt. 19. What should be reported in your annual report? Thomas McLaughlin Responds: The content is really up to you, but for financial matters the minimum is usually the balance sheet and the statement of revenue and expenses. Remember that the document is going to non-financial people, so graphs and charts can help decipher all those numbers. Also, check with your auditor about presenting their work in such a public setting in a different format than the way they gave it to you. 20. Do you have any samples of a whistleblower policy? Thomas McLaughlin Responds: Check out viewpage&pageid=430 provided by the National Council of Nonprofit Associations. 21. Is the auditor reporting to the finance committee enough to cover Step 6: Ensure Auditor Communication to the Board? Thomas McLaughlin Responds: It s a start. It would be good to draw the entire board s attention to the key points. Many boards just want to the audit committee to get them off the hook, but the committee should find a way to ensure that the whole board understands the financial picture. 4 Also important are informal conversations whenever issues arise. Informal and even social contact between board members and the auditors may be a way to encourage open communication (this is one of the unstated purposes of golf tournaments and the like). Communication shouldn t be limited to once a year when the audit comes out. Ideally, both

5 the auditors and the committee members will find ways to stay in touch regularly. One of the ways we use audit reports is to point out future trends and possible items of interest, good and bad, in the report. It s easy to turn the audit report into a flat, twodimensional document, but at best it will be used to shape a responsible organization s fiscal planning. 22. What do you think is the purpose of limiting board size? Thomas McLaughlin Responds: Candidly, large boards (those with 25, 35 or more members) about Blackbaud Blackbaud is the leading global provider of software and related services designed specifically for nonprofit organizations. More are frequently hapless. It s easy for individual members to sit in bewildered silence or to let others carry the load. Sometimes factions develop and spend their time fighting each other rather than carrying out their responsibilities. Smaller boards mean fewer trees for board members to hide behind and therefore greater accountability. It s also easier to get a smaller group working as a team. than 12,500 organizations use Blackbaud products and consulting services for fundraising, financial management, business intelligence and school administration. Blackbaud solutions 23. Why is the senate finance committee recommending less than 15 members on Board? Thomas McLaughlin Responds: See previous answer. include The Raiser s Edge, The Financial Edge, The Education Edge, The Patron Edge, Blackbaud NetCommunity, The Information Edge, WealthPoint and ProspectPoint, as well as a wide range of 24. Can the husband of a Board Member be the Project Manager for a project that is receiving federal funding (federal grant)? Thomas McLaughlin Responds: Don t go there. This is wrong in so many ways it s hard to count. Have the board member resign. consulting and educational services. Founded in 1981, Blackbaud is headquartered in Charleston, South Carolina, and has operations in Toronto, Ontario; Glasgow, Scotland; and Sydney, Australia. For more information about Blackbaud solutions, contact a Blackbaud account representative. In the United States and Canada call toll-free In Europe, call +44 (0) Visit us on the Web at January 2005, Blackbaud, Inc. This white paper is for informational purposes only. Blackbaud makes no warranties, expressed or implied, in this summary. The information contained in this document represents the current view of Blackbaud, Inc., on the items discussed as of the date of this publication. 5