By Colin Hannifin, CPA, Business Assurance & Advisory Services Manager | Not-for-Profit Team
Serving as a board member for a not-for-profit organization can be a daunting task. The role often includes helping shape goals to guide the organization, connecting the organization with resources to help with fundraising and capital management, and providing financial oversight to the organization – and those are just some highlights of the roles and responsibilities of an active board member. Monitoring and exercising oversight of an organization’s financial statements is particularly important, as it helps ensure the organization can continue to serve its mission into the future.
Focus Areas for Nonprofit Board Review of Financial Statements
One of the most significant methods of performing financial oversight is the board review of the organization’s financial statements. The organization’s accounting department should regularly present internally-prepared financial statements, and periodically, reviewed or audited financial statements may be presented to the board along with an opportunity to talk to the organization’s external accountants. There are several key things to be mindful of when performing such a review, such as:
Are the financial reports providing the appropriate information and insights?
While financial statements, particularly if audited or reviewed, include mandated disclosures and formats, management-prepared financial reports can show additional information, such as budgetary information, non-financial information, and projections of future performance.
Typical financial metrics used in managing a for-profit business may not apply.
Many not-for-profit organizations rely on regular donor contributions to maintain operations. However, as with for-profit operations, the management of the entity’s cash deposits is of paramount importance. Monitoring previous period cash management and projections of future cash management can ensure that the organization can continue to service its mission into the future.
Functional expenses, which break down the natural classification of expenses by function, is an important reporting tool.
By analyzing the reported functional expenses, which is now required to be reported for not-for-profit financial statements to follow generally accepted accounting principles, a board member can determine how much of the organization’s operations focus on mission delivery as opposed to overhead and fundraising. Different organizations may have different expectations or thresholds when it comes to expense allocation between functions; it is important to establish baseline expectations by which to judge current performance.
If the organization receives audited financial statements, the auditors will also present the results of their audit along with any recommendations for improvements to internal controls.
Not-for-profit organizations are often very mindful of their overhead expenses; this can result in small accounting departments. However, entrusted with donors’ money, it’s important for not-for-profits to have strong systems of controls. There should be regular discussion of internal controls with the internal accounting team for the organization.
Don’t be afraid to ask questions, whether to organization management or external accountants.
Active oversight requires constant engagement and consistent dedication. This includes a critical review and analysis of financial information.
Board involvement and review of financial information is a critical control for not-for-profit organizations. Being involved and engaged can help ensure the organization has the support it needs to continue to drive mission delivery for years to come.
Additional Resources for Nonprofit Board Members
- Not-for-Profit Board Review of Form 990
- Serving on an Not-for-Profit Board? You should be familiar with Form 990
- Mission Possible: Profile of an Effective Not-for-Profit Governing Board
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.