California Association of Nonprofits Event “Now What? Turning Adversity into Opportunity” – March 8-9, 2005 – Day Two

The highlights:

CAN Executive Director Flo Green asserted that the key to public accountability of nonprofits is standardized, quality financial reporting.  She introduced CAN’s Nonprofit Quality Reporting Initiative with its Unified Chart of Accounts as a starting point to make accountability a greater emphasis to leaders of nonprofits and more efficient.

Belinda Johns, Senior Assistant Attorney General, California Attorney General’s Office, described the Attorney General’s goals in introducing SB 1262, the Nonprofit Integrity Act, together with Sen. Byron Sher.  She noted that 400 new charities register each month with the Registry of Charitable Trusts.

Geralyne Mahoney, CPA, Burr, Pilger & Mayer, discussed the importance of the audit committee and implementing best practices beyond what is required by law.  For example, she emphasized the importance of having someone with financial expertise on the audit committee, having at least one board member on the committee and creating a charter detailing specific duties and responsibilities, including:

  • monitoring and investigating whistleblowing incidents;
  • pre-approving nonaudit services;
  • evaluating performance of the auditor;
  • keeping minutes;
  • identifying and assessing significant items of risk;
  • reviewing the management letter and determining how to address issues raised by the letter; and
  • reviewing any audit adjustments.

Mahoney emphasized that staff, including the executive, should not carry out the audit committee’s duties and should not filter information to be presented to the audit committee.

Mahoney also discussed the two types of fraud of which executives and board members should be aware:  (1) misappropriation of assets, and (2) fraudulent financial reporting.  To prevent fraud, nonprofits should consider the following:  (i) background checks (as permitted by law), (ii) a whistleblower policy, (iii) a realistic budget (i.e., one that does not create an incentive to falsify financial records), (iv) regular review of the balance sheet by the board (risk areas include hiding misappropriated assets in the fixed assets and prepaid expenses accounts), (v) appropriate segregation of duties detailed in a formal internal control policy (e.g., do not allow the same person/department open the mail, record the checks received, and deposit such checks), (vi) periodic review of the payroll by the executive to ensure no fictitious employees, and (vii) approval of the executive’s expense report by the board.  Directors should be aware of the pressures to manipulate financial information in order to meet budgetary marks and/or present the organization or one of its departments in the best light.  Mahoney suggested adopting a Code of Ethics and training staff in the organization’s accounting policies.

Pamela Davis, President and CEO, Nonprofits’ Insurance Alliance of California (NIAC), presented on accountability from an insurance company’s perspective.  She began by emphasizing that good management is risk management; risk management does not simply mean insurance.  She provided some pertinent statistics based on her organization’s experience:

  1. 1% of the 4,700 nonprofits insured by NIAC file employee/volunteer dishonesty claims with an average loss of $6,160;
  2. 95% of claims against board members are employment-related (termination, discrimination, harassment, disability), of which 50% result in lawsuits;
  3. 70% of claims against board members do not result in any payment to the plaintiff/claimant;
  4. Average cost if no liability = $4,300, average cost if some liability = $72,000;
  5. 5% of nonprofits have a D&O claim each year;
  6. Average cost of a D&O policy = $2,500; and
  7. 90% of premiums paid by nonprofit insureds are paid in claims.

Davis also identified recommended practices for board accountability:

·     Stay out of HR issues, except those involving the ED;

·     Complete annual conflict of interest disclosure;

·     Excuse self from any conflicted issue;

·     Avoid having service provider to organization on board;

·     Control individual board member influence;

·     Control founder/funder/donor influence;

·     Read board meeting materials;

·     Use common sense.

Tom Silk, Partner, Silk, Adler & Colvin, discussed governance issues.  He described the trend toward greater accountability of directors beginning from 2002 with the passage of the Sarbanes-Oxley Act (which generally applies to public companies).  From a bird’s-eye view, he noted that the laws and regulations with respect to nonprofits appeared to be developed for a different charitable sector.  Silk described the rapid growth of the number of registered charities from roughly 32,000 in 1950, to 535,000 in 1996, to 882,000 in 2004 (he also noted that California is the state with by far the greatest number of nonprofits:  about 102,000).

Silk reiterated the theme of many of the speakers that nonprofits must strive to adopt best practices that go beyond what the law requires in order to provide transparency to the community and develop public trust.  He believes that best practices will continue to evolve and become more widespread in the coming years.  It would be beneficial for nonprofits to collectively develop and present their positions on reshaping the law in light of the changes in the sector, a discussion that is now ripe for government. 

Silk also referenced his paper Ten Emerging Principles of Governance of Nonprofit Corporations and Guides to a Safe Harbor ( and stated his belief that the following guides remain pertinent:

(1)   Increasingly, charities are expected by the public to take the high road.

(2)   It is no longer sufficient for a charitable organization to merely comply with the letter of the law or even the spirit of the law.  The charity must go beyond the law.  The public now looks to charities to act as moral agents.

(3)   Charitable organizations with the greatest likelihood of satisfying emerging public expectations will be those that take all measures necessary to ensure that the conduct of its directors, officers, and employees reflects the highest ethical standards appropriate to the organizations’ structure and mission.

(4)   To settle for less is to run the risks that the charitable organization’s reputation for integrity will be weakened, its respect by the community will be diminished, and its ability to fulfill its mission will be imperiled.