Often, the number of board members will be governed by state law. Your legal counsel can assist with your specific requirements. From a best-practice perspective, it is generally recommended that the board of a not-for-profit have at least 3-5 members, the majority of which are unrelated to each other.
Read more about board structure.
For exempt organizations both big and small, it is always a good idea to provide some sort of orientation for incoming board members, in addition to a written description for their position. Topics of discussion during this new board member orientation could include the following:
- Organization’s mission
- Organization chart
- Review of Bylaws
- Review of most recent Form 990
- Board member responsibilities
- Board member fundraising obligations
- Board meeting frequency
View the AICPA Not-for-Profit Section’s Guide to Board Orientation.
Successful board meetings often result from thoughtful planning and preparation. Draft an agenda in advance, and be strategic in both order and time allocations to ensure that the board can focus its attention on the most important priorities. A consent agenda (a group of routine business items that can be approved in one action) can be a good tool to help the board move quickly through routine or procedural items and preserve time for priority agenda items. Make sure that materials including the agenda, past meeting minutes, and relevant reports, are clear, succinct, and provided to board members well in advance of the meeting (at least one week) to ensure that directors have adequate time to review them prior to the meeting.
Read this article for more information on reporting to the board.
A legal requirement to utilize an audit committee varies from state to state. Your organizations legal counsel can assist in assessing your specific needs. For example, in California, charitable organizations are required to have an audit committee that is separate from the finance committee if their annual gross receipts exceed $2 million. For those organizations not subject to a legal requirement, using an audit committee is considered a best practice when the NFP has or is considering obtaining a financial statement audit.
This article discusses the merits of an audit committee.
Absolutely not. A successful not-for-profit board generally includes diverse individuals who all have a passion for furthering the mission of the not-for-profit. Board members participate in the financial, operational and strategic policy and decision-making. Board members possessing a wide variety of skills and backgrounds will benefit the NFP. For those board members without accounting or financial management experience, it may be necessary to seek training to be able to fulfill the fiduciary responsibilities to the organization. Board members who don’t have financial expertise, however, should not serve on the audit or finance committee.
Not-for-profits should evaluate whether term limits for board members would be appropriate for their organization. Some organizations may decide that limits help to keep the board dynamic and infused with new perspectives and ideas, while others may feel that term limits lead to struggles with continuity and support. Whichever approach an organization takes, it is important that it be documented and followed. For organizations with term limits, consider having a staggered-term process to support continuity and prevent large turnovers of board members at once. For organizations without term limits, consider having policies in place that keep long-serving board members refreshed on their duties and engaged with the organization.
Asking board members to assist with fundraising is very common in not-for-profit organizations that rely on donations as a revenue source. The board has a fiduciary responsibility to ensure that the organizations has adequate resources to serve its mission, and fundraising is often a key component to this. Before joining a board, it is always a good idea to ask about fundraising expectations and make sure you are comfortable with the commitment.
In the board context, a conflict of interest arises when a board member (or anyone considered to be related to the board member) undertakes a transaction with the not-for-profit, including transactions that involve the board member providing a discount for their services. Transactions with conflict potential need to be disclosed to and scrutinized by the board BEFORE they are undertaken. Appearances of conflict should also be reviewed as they can impact the reputation of an organization. A robust conflict of interest policy covering both financial and nonfinancial conflicts is a means to establish procedures that will offer protection against charges of impropriety involving officers, directors or trustees.
A sample conflict of interest policy is available in the AICPA’s Not-for-Profit Governance and Management Resource Library.
It depends. Although there is not a federal requirement that all exempt organizations have an audit, there are many possible triggers that can cause an organization to require an audit. Some state charitable registrations require organizations over a certain size to have an audit, for instance. Receiving federal or state funds over certain thresholds can also trigger audit requirements. Even some foundation grants or loan agreements may have audit requirements. It is important to understand the specific circumstances of your organization to determine whether you are required to have an audit. It is worth noting that many organizations choose to have an audit, even when not required by an outside body, to demonstrate good financial stewardship and transparency.
Read this article to evaluate whether your organization should consider an audit.
Yes, there are alternatives. One option may be a review, which is less in scope than an audit, and generally costs about 50-60% of what an annual financial audit would cost. There is also the option to have a compilation; however, compilation engagements do not provide a basis for obtaining or providing any assurance regarding the financial statements. The level of service needed is often a function of the needs of the financial statement users, and could include agreed upon procedures over specific risk areas identified by the board.
Read this article to learn more about the merits of an audit versus another type of engagement.
IRS Form 990 is an informational return that most not-for-profit organizations are required to file annually. It is a public document and the primary source of information regarding the finances, operations, executives, fundraising efforts, etc. of the filing not-for-profit. Form 990 should be annually reviewed by the board (or a subcommittee thereof) BEFORE it is filed with the IRS. Board members should fully understand and verify the information in the form 990, and should feel comfortable asking questions until they are satisfied. A good industry practice is to post the public inspection copy of the filed Form 990 on the organization’s website. Read an overview of the Form 990 series of returns.
There is no federal requirement to provide your financial information on your website. The IRS requires that you make your Form 990 publicly available, but does not specify the method required for doing so. Certain charity watchdog organizations require member organizations to make their financial statements available to the public. In the interest of transparency, it is considered a good industry practice to post both the IRS Form 990 and the NFP’s annual financial statements.
In short, no. Managing liquidity is more of a practice than a policy. It is important to consider—and document—your liquidity strategy and practices, because those will inform your liquidity and availability disclosure. Your operating reserve and investment policies likely will contain relevant information such as investment portfolio composition and strategies, endowment spending allowances, and reserve requirements. The format of your liquidity and availability disclosure will depend on your NFP’s business model, the relative liquidity of your organization’s resources, donor-imposed restrictions and internal board designations on those resources, and so on. The AICPA Not-for-Profit Section offers example disclosures for a variety of NFP types under our ASU 2016-14 Resources. The ASU itself also provides a few example disclosures.
An operating reserve can be a valuable tool to help a not-for-profit entity respond to temporary changes in circumstances or in its environment. By building and maintaining an operating reserve, an organization can better manage its cash flow on a day-to-day basis.
View a sample operating reserve policy along with things to consider when creating such a policy.
This is a question that comes up frequently and there is no single answer. There are many factors that should be considered in developing a document retention policy. For example, many laws relating to document retention are state-specific (such as those governing employment/payroll). You should consult legal counsel to assess the requirements that apply to your organization. Also, grants received from the federal government will often include specific requirements for document retention. Each not-for-profit should examine its specific activities to determine the appropriate document retention policy for its circumstances. A formal document retention and destruction policy, which is adhered to by all individuals involved with the not-for-profit, is considered an important best practice. Such a policy can also eliminate accidental or innocent destruction of documents.
View a sample document retention policy.
Yes, absolutely. In fact, a modest surplus or increase in net assets is a good goal for most not-for-profit organizations. A positive change in net assets allows not-for-profit organizations to build up reserves and contributes to their long-term financial sustainability. The term “not-for-profit” comes from the fact that not-for-profit organizations exists to the benefit of the public and has no owners. This means that rather than distributing surpluses to shareholders or owners as would be done in a for-profit organization, not-for-profits must use those funds to carry out the purpose for which they were created.