Advising Nonprofit Organizations

By Kelley, Claudia L.; Anderson, Susan | The CPA Journal, August 2006 | Go to article overview

Advising Nonprofit Organizations

Kelley, Claudia L., Anderson, Susan, The CPA Journal

The CPA's Role in Governance, Accountability, and Transparency

The nonprofit sector plays a major role in the U.S. economy, encompassing, according to an April 2005 statement by IRS Commissioner Mark Everson before the Senate Finance Committee, more than 1.8 million organizations, with assets totaling $2.5 trillion and revenues of $1.25 trillion. The importance of nonprofits has become especially evident in the relief efforts for victims of Hurricane Katrina in 2005 and the Asian tsunami of 2004. Federal, state, and local governments increasingly rely upon nonprofits' services after natural and manmade disasters. Nonprofit organizations (NPO) must maintain the public's confidence in order to raise the funds necessary to fulfill their missions.

Unfortunately, many NPOs have been found to engage in financial improprieties. Highly regarded organizations-including the United Way of America, the Nature Conservancy, and Adelphi University-improperly diverted funds to insiders. The Red Cross was criticized for diverting donations specified for victims and victims' families of the September 11, 2001, terrorist attacks to other uses. When NPOs are perceived as acting irresponsibly, the public can quickly feel that its trust has been violated. Reports of unsavory behavior in one NPO can cause a decline in giving to other charities. In response to these problems, stakeholders of charitable organizations are demanding more accountability and transparency.

The Senate Finance Committee is considering tax-exempt reform containing provisions similar to those found in the Sarbanes-Oxley Act (SOX). The Panel on the Nonprofit sector, an independent group of NPO leaders convened by the Independent sector (, a nonpartisan leadership forum for charities, foundations, and corporate-giving programs, recommended more than 120 separate actions to strengthen accountability and governance. State attorneys general are pursuing allegations of abuse in the nonprofit sector more vigorously. California enacted the Nonprofit Integrity Act of 2004, which applies provisions similar to SOX to nonprofits. New Hampshire passed a law requiring charities with annual revenues greater than $1 million to have audited financial statements. Massachusetts and New York are considering similar requirements.

The demand for greater NPO accountability provides opportunities for CPAs. As reported in Association Mtuuigentent (April 2004), 77% of the participants at the AlCPA's first National Consensus Conference on Nonprofit Governance strongly agreed that the nonprofit community must act to affirm its integrity to members, donors, the government, and the public, CPAs, in their roles as NPO employees, volunteers, directors, auditors, and advisors, can provide help to improve NPO governance and transparency. This article describes weaknesses in a nonprofit's operations and policies. By identifying these potential problems. CPAs can help NPOs improve organizational effectiveness.

Board Responsibility

The well-publicized scandals and increasing government scrutiny demonstrate the need for due care on the part of NPO board members and senior managers. Nonprofit directors and officers have three fiduciary duties under current law: the duty of care, the duty of loyalty, and the duty of obedience. If directors do not exercise these duties, they may be personally liable for their actions.

The duty of care requires that directors be informed and act in good faith. This duty addresses the manner in which the directors exercise their responsibilities, rather than the correctness of a decision. The duty of care requires that directors be informed, attend board meetings, and have access to organizational data.

The duty of loyalty requires directors to exercise their powers in the best interest of the organization rather than in their own or anyone else's interest. Avoiding conflicts of interest, in appearance or in fact, is a prime element of this duty. …

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