Test Yourself! Are You Ready to Serve on a Nonprofit Board?

David L. Cotton, CPA, CFE, CGFM

As an accountability professional, sooner or later, every CPA will likely be asked to serve on the governing board of a nonprofit organization. A CPA’s training and expertise can add a great deal to the quality of corporate governance. But the decision to accept a board position should not be taken lightly or made hastily. The following quiz can help you assess whether you are ready to accept the challenge of governance. See below for quiz answers and explanations.

1.   Except for corporate boards of publicly traded companies, most board positions are essentially just honorary positions. True or false?

2.  If I serve on a board, I can only be sued personally if:

a.   I receive pay for my service on the board.
b.   I receive remuneration beyond my actual expenses of attending board meetings.
c.   I was present at the board meeting at which the actionable decision was made.
d.   All of the above.
e.   None of the above.

3.   As a board member, I am automatically covered by the organization’s liability insurance policies. True or false?  

4.   The generally recognized standards of conduct that board members must follow are:

a.   Duty to attend meetings; duty to be objective; and duty to be properly prepared for meetings.
b.   Duty to be financially responsible; duty to read the annual reports; and duty to avoid conflicts of interest.
c.   Duty of care; duty of loyalty; and duty of obedience.
d.   All of the above.
e.   None of the above.

5.   The Volunteer Protection Act of 1997 grants board members immunity from personal liability for certain acts in an effort to promote volunteerism. True or false?

6.   As a board member, I am only authorized to see the organization’s books if such access is specifically allowed by the organization’s bylaws or other written policies. True or false?     

7.   As nonprofit organizations generally operate with low budgets and do not accumulate assets or reserves, the risk of fraud occurring in a nonprofit is relatively low. True or false?

8.   The best internal control feature that any organization can have in place is:

a.   A policy of only hiring employees who can be trusted.
b.   A very strong, knowledgeable, experienced and in-control chief executive officer.
c.   A CFO with a background in public accounting.
d.   An annual audit.
e.   A knowledgeable and actively involved board of directors.
f.    All of the above.
g.   None of the above.

9.   Under current auditing standards (for non-issuer entities), an organization’s outside auditors only need to report evidence of fraud to the board when:

a.   The fraud has a material effect on the financial statements.
b.   The fraud involves senior management.
c.   The fraud involves other board members.
d.   The fraud involves federal programs.
e.   All of the above.
f.    None of the above.
g.   Only a and b.
h.   Only b, c and d.
i.    Only a, b and d.

10.  Nonprofit board members should:

a.   Read and understand the organization’s bylaws.
b.   Read and understand the organization’s financial statements and audit reports.
c.   Read and understand all policies and procedures, especially personnel policies and procedures.
d.   Attend as many meetings as possible.
e.   Assure that any of her or his dissenting votes on key decisions are noted in the minutes.
f.    Consider obtaining directors’ and officers’ (D&O) insurance.
g.   All of the above.
h.   None of the above.
i.    Only a, b, c and d.

Answers

1. False. Serving on any corporate board is a very serious responsibility. As a board member for a nonprofit organization, you will be held accountable for the stewardship of donor contributions. Before you agree to serve on a board, make sure you fully understand your role and responsibilities. Study the organization’s history, structure, management and financial stability. Review the articles of incorporation, bylaws and recent financial statements and audit reports. Because you have CPA after your name, you will probably be held to a higher standard than your fellow board members.

2. e. None of the above. According to BoardSource (formerly The National Center for Nonprofit Boards), “even the most scrupulous conduct provides no guarantee against lawsuits. Indeed, board members are sometimes named as defendants simply to add impact to the plaintiff’s case.” Consequently it is wise to research the organization’s legal history before agreeing to join its governing board.

3. False. The organization may not even have liability insurance. If it does, that insurance may not cover governing board members. Waiting until you get sued to find out about insurance coverage is too late. Ask about insurance and read any policies before agreeing to serve.

4. c. Duty of care; duty of loyalty; and duty of obedience. The duty of care is the care that “an ordinarily prudent person would exercise in a like position and under similar circumstances.” As a board member, you are expected to:

• Attend board meetings regularly
• Show independent judgment
• Be informed about organizational activities
• Rely on trustworthy information sources
• Delegate only to responsible individuals
• Follow up regularly to make sure board directions are carried out

The duty of loyalty means that you must “give undivided allegiance to the organization when making decisions affecting the organization… Board members cannot put personal, family or business interests above the organization’s interests.” As a board member, you must avoid conflicts of interest, in appearance or in fact. Fortunately, this is an ethical concept with which all CPAs are very familiar.The duty of obedience means that your responsibility as a board member is to ensure that the organization does not stray from its core purpose in its actions. Donors to nonprofit organizations must have assurance that donated funds are used only for purposes specified in the bylaws, articles of incorporation, mission statement or website.

5. True. Prior to 1997, inconsistent laws across the country created confusion and in many cases lead to reluctance to volunteer. The Act is designed to increase volunteerism by providing a consistent level of protection for volunteers. Generally, as a board member, you will be protected if (a) you act within the scope of your responsibilities as a board member; (b) your CPA license is current; and (c) you do not engage in criminal conduct, reckless misconduct or gross negligence. But, remember, while the Act may protect you from liability in the areas it covers, it cannot prevent you from being sued.

6. False. As a board member, you have a responsibility to stay sufficiently informed to be able to fulfill your responsibilities. Even if a board member’s right to access books and records is not specifically stated in the bylaws or other policies, every board member has a “legally implied right to the information necessary” to properly govern the organization.

7. False. A recent Google search on “embezzlement & nonprofit” generated 243,000 hits. A search on “fraud & nonprofit” yielded 2,800,000 hits. The fact of the matter is that nonprofit organizations tend to be very vulnerable to fraud for a variety of reasons. Nonprofits often rely heavily on volunteer workers who may not go through the normal vetting process that employees undergo. Nonprofits are often unwilling to spend resources on establishing strong internal controls. Nonprofits sometimes have autocratic and overly controlling chief executives or top management. Unlike for-profit entities, nonprofits often do not have clear and measurable relationships between revenues, expenses and outputs. And finally, nonprofits often do not have governing boards exercising strong oversight.

8. e. A knowledgeable and actively involved board of directors. Answers a–d are all important. Answer e, however, is the best answer, because a knowledgeable and involved board will ensure that those other attributes are in place. A strong governing board will ensure that hiring policies are sound, keep an overzealous executive in check, assure that proper financial management is in place, retain and supervise high-quality auditors and so forth.

9. g. Only a and b. Statement on Auditing Standards (SAS) Number 99, Consideration of Fraud in a Financial Statement Audit, only requires auditors to report to the audit committee (or equivalent) “fraud involving senior management and fraud (whether caused by senior management or other employees) that causes a material misstatement of the financial statements. …” The SAS also says, however, that “the auditor should reach an understanding with the audit committee regarding the nature and extent of communications with the committee about misappropriations perpetrated by lower-level employees.” As a CPA serving on a nonprofit board, you should make clear to your auditors that you want them to report every indication of potential fraud that they observe or suspect.

10. g. All of the above. Before saying “yes” to an invitation to join a noprofit’s governing board, you need to carry out “due diligence.” Read and understand the bylaws, financial statements, mission statements and audit reports. Once you say yes, attend as many meetings as possible. Because the minutes are the board’s formal meeting records, make sure that your dissent on any major or key issues is clearly noted. Finally, consider your exposure to liability and ensure that you have appropriate insurance coverage.

Grading your quiz

If you scored 90 percent or better, congratulations! You have a solid understanding of the seriousness of serving on a governing board, and you are ready to accept an invitation to serve. If you scored below 90 percent, you would be wise to study the responsibilities further before agreeing to accept a governing board position.

BoardSource (www.boardsource.org) is an excellent source of information for becoming thoroughly educated about nonprofit board member duties and responsibilities.

Two other recent publications should be “required reading” for any CPA serving on a governing board. “Management Override: The Achilles’ Heel of Fraud Prevention” provides valuable insight into a board member’s responsibilities related to overseeing management. It is available at no cost at www.vscpa.com/ManagementOverride.

“Managing the Business Risk or Fraud: A Practical Guide” contains the attributes of a sound fraud risk management program that an entity that is serious about protecting stakeholder assets should put in place. It is available at no cost at www.vscpa.com/BusinessRiskFraud.

Serving on a nonprofit board can be a very rewarding experience. It requires a time-consuming commitment. A CPA should undertake due diligence before agreeing to serve and should serve with diligence and dedication.

David L. Cotton, CPA, CFE, CGFM is chairman of Cotton & Company LLP in Alexandria and currently teaches fraud examination and forensic accounting at The George Washington University. He has served on several nonprofit boards during his career. Contact him at dcotton@cottoncpa.com.