By Amy Rybar Menefee, CPA, CFE, Partner
Help protect your nonprofit’s reputation with a conflict of interest policy
Business arrangements may cause conflicts of interest which may be either direct or indirect, making them sometimes hard to identify. A conflict of interest may exist when a person in a position of authority can benefit financially from a decision. Examples of people in positions of authority include an officer, key employee, director, trustee, or manager. Business transactions with spouses or dependents of these key people may also give rise to a conflict of interest. Some conflicts of interest may not be automatically unethical, which is why independent members of an organization’s governing body should know about any potential conflicts of interest so they can independently evaluate the risks and benefits of the arrangement and determine whether to proceed with the arrangement.
Strong governance requires an organization to be fully aware of and transparent regarding relationships. The IRS Form 990 asks about whether a nonprofit has a written policy on conflicts of interest, the process the nonprofit uses to manage conflicts, and how the nonprofit determines whether board members have conflicting interests. In addition, requirements under state laws vary.
Therefore, best practices for nonprofit organizations include having a written conflict of interest policy which follows the minimum requirements of the state nonprofit corporations act, which took effect on January 1, 2022, and safe harbor provisions for transactions subject to IRC Section 4958, which imposes an excise tax on excess benefit transactions between disqualified persons and an applicable tax-exempt organization.
How to write a strong conflict of interest policy
Conflicts of interest may be real, or they may be potential or perceived. A strong written conflict of interest policy provides assurance that all types of conflicts, whether potential, perceived, or real, are given adequate attention.
A strong conflict of interest policy should include the following:
- The definition and some examples of a conflict
- To whom the policy applies including how the policy applies to relatives of affected individuals
- The requirement for those who have a conflict, or think they may have a conflict, to disclose the conflict or potential conflict
- The process by which a conflict should be reported when noted by others
- The process to resolve an apparent conflict
- That board members may not vote on any matter for which they have a conflict
Once a written conflict of interest policy is in place, nonprofit organizations should monitor compliance with the conflict of interest policy by all who are covered by it. This typically includes having each person to whom it applies affirm in writing that they are unaware of having engaged in any transaction not permitted and/or, that they have disclosed any potential transactions which may cause a conflict via use of an annual conflict of interest disclosure form.
In summary, a policy governing conflicts of interest is one of the most important policies a nonprofit organization can have. For the most impact, the policy should be in writing and include key points, and should have a process by which conflicts are evaluated and resolved, and compliance with the policy should be monitored. A strong policy will help provide assurance that all types of conflicts receive adequate attention and resolution.
If you have questions regarding a conflict of interest policy for your nonprofit, please contact your not-for-profit Keiter Opportunity Advisor. Our not-for-profit team is well versed in these and other not-for-profit best practices.
More resources for strong not-for-profit governance.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.