Critical Issues Facing Nonprofit Boards

By April 20, 2021Accounting, Nonprofit

Nonprofit boards have duties of care, loyalty, and obedience (or trust) to their organizations. How these duties are carried out may depend upon the organization and the work that the board completes, but it almost always spans important areas such as compliance and governance. The following critical issues facing nonprofit boards are sometimes overlooked in the wake of the COVID pandemic, but all are important to the long-term success of an organization.

Tax, Accounting, and Financial Compliance Issues

Even though nonprofits may have tax-exempt status, tax issues are still something that nonprofit boards must be knowledgeable about in order to manage effectively. Boards must be aware of:

  1. Unrelated business income tax: This is a tax imposed on a nonprofit that is not related to the nonprofit’s primary revenue-generating purpose. Boards must be aware of these activities and ensure that positions are well-documented.
  2. Worker classification: A critical compliance issue for nonprofits is the proper designation between employees and independent contractors. Under-counting employees by hiring (and treating) independent contractors as if they were employees can be a significant issue for nonprofits.
  3. Executive compensation: Executive compensation remains a hot-button issue for the public, and one that should be kept in mind by nonprofit boards as they review salary and compensation packages for executives.
  4. Financial reporting: boards are responsible for understanding the organization’s mission and ensuring that the organization’s funds are used appropriately. This means that, at a high level, funds are used to support the organization’s mission. Members must take the time to review financial information and understand the financial ramifications of major decisions.
  5. Clear documentation: Lastly, boards must note anywhere that audited financial statements are shared such as GuideStar and Charity Navigator. They should take care to add any financial disclosures or additional information that may be needed and to alert auditors of any known issues or needs pertaining to financial disclosures.
  6. Revenue recognition: FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, effective in 2018, should be reviewed by boards and understood to ensure consistent and careful compliance.

Nonprofit Governance Issues

Boards also must exercise a duty of care for governance issues. Some issues that may occur include:

  1. Conflicts of interest: Both perceived and actual conflicts of interest should be taken seriously and addressed. Perceived conflicts of interest can be just as harmful as actual ones, and may tarnish a nonprofit’s reputation and goodwill with the public.
  2. Form 990: IRS Form 990 poses good questions that the board members should consider when thinking about governance issues. It’s a useful document to help the board remember important governance issues.
  3. Strategy: Nonprofit boards are key drivers of organizational strategy. It is incumbent upon the board to work with chief executives to develop and drive the strategy and messaging for the organization. To do so ensures continuity of mission and message and helps position an organization effectively.

How Healthy Is Your Board?

Having a seat on a nonprofit board is an honor, but it is also a lot of hard work. Understanding the nonprofit environment, basic accounting and financial information, ensuring the bylaws and rules regarding the nonprofit’s operations and management are followed, and working with key staff members to position the organization for strong and steady growth is the equivalent of a full-time job.

But for board members who believe in the organization’s mission, it is a labor of love. How does your nonprofit board measure up?

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.