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Is Your Nonprofit Organization at Risk?

As published in the November 2009 issue of The Greater Lansing Business Monthly.

Revenue pressures. Cost pressures. Staffing pressures. Overworked volunteers. Concerned donors. The list goes on and on. The financial stress of the last couple of years has hit nonprofit organizations hard. Just like everyone else, they are trying to do more with less. This magnifies an already unique combination of risks.

Most of us have a connection to a nonprofit organization—as a board member, employee, volunteer, donor or other stakeholder. What can you do to help your organization stay on track, maintain proper control, and stay true to its mission? The first step is to take a snapshot of your risk.

Organizational vulnerability

With a better understanding of relevant risks, nonprofit organizations can put safeguards in place to 1) help prevent fraud and abuse, 2) maintain compliance with regulations, 3) provide accurate financial information and 4) accomplish the organization’s mission. To gauge where nonprofit organizations are most at risk today, we asked a group of about 30 nonprofit executives, board members and auditors the question, “In which areas do you believe your nonprofit organization is most vulnerable?” Although this was an informal survey, the group’s responses below might help you recognize areas of risk in your organization.

Finance

• Cash collection

• Cash flow monitoring

• Cash disbursements control

• Limited access to cancelled checks or electronic check images

• Overuse of petty cash funds or presence of “off-the-books” accounts

• Use of organizational credit cards

• Special events where cash receipts could be diverted

• Inadequate separation of duties

• Accounting oversight is not performed or is performed by those who lack proper skill

Operations

• Staff that is insufficiently trained in accounting or the nonprofit industry

• “Rubber stamp” boards

• Lack of a clear conflicts of interest policy

• Executive director that is too controlling or not in sufficient control

• Inadequate inventory control

• Lack of volunteer accountability

• Inadequate or vulnerable software

• Lack of written policies for employees and volunteers

• Security related to online activities

• Password security

• Separation of operating funds from grant funds

Compliance

• Taxation issues, such as unrelated business income and sales/use tax

IRS Form 990 reporting

• Complexity of grant compliance

• Lack of adequate grant monitoring

Governance

Management and the board must work together to reduce risk. Management starts by identifying risks and finding ways to reduce them. The board, through its monitoring and oversight, is responsible for management carrying out that process. The board is also charged with mitigating the risk of management override of established controls.

The more a board understands its collective and individual roles, the more effective it is. How can a board be more effective? We asked the same group of stakeholders the question, “If you could change any two things about your board, what would they be?” Here is what they said:

• Improve board members’ understanding of their role

• Improve the board’s recognition of its fiduciary role

• Shift the board’s focus from day-to-day management to policy-making

• Improve the skill of the treasurer

• Improve the meeting management skill of the board chair

• Improve financial literacy

• Increase the board’s diversity of skills and background

• Maintain independence from management

• Constitute a board of manageable size

• Reduce board politics by staying focused on the organization’s mission

• Improve the content and length of board minutes

• Prepare and monitor a budget

• Follow well-organized agendas

• Follow parliamentary procedure

Controlling risk

This is not an easy process. Each nonprofit organization needs to estimate the potential loss—quantitative or qualitative—of each risk, the likelihood that it will occur and the cost it is willing to spend to prevent or reduce it. The revenue, cost and staff pressures won’t go away. Volunteers might still feel overworked. But if you work smart, stay focused, and use a little common sense, you can continue to serve well with a mission that makes a difference.