Ten Signs of Financial Trouble for Board Members
Over 90% of BoardAssist placements are serving as leaders on the boards where we place them within 12 months of being placed. What does being a leader mean? Among other things, it means being able to support your nonprofit in fiscal matters by spotting the early signs of trouble before it is too late. This week’s guest blogger, finance pro Paul Konigstein, provides us with a terrific check list for trouble in this week’s terrific guest post. Thanks Paul!
Ten Signs of Financial Trouble for Board Members
My computer programmer friends have a saying: garbage in, garbage out. In other words, if the data entered into your program is no good, the reports won’t be any good either. As a Board member, you are the governance program. The information you receive from staff is the data entered and your actions are the output, or reports. Here are ten signs the information you receive may not be of sufficient quality for you to take proper actions.
1. FINANCIAL INFORMATION IS LATE – The benchmark time to prepare financial reports is one month for the most complicated nonprofits. For example, the Board should expect a report for the period ended September 30 by the end of October. A longer turnaround time is an indication that either the finance function is understaffed, financial processes are inefficient, or finance is not a high leadership priority, or all of these.
2. FINANCIAL INFORMATION IS INCONSISTENT FROM REPORT TO REPORT I consulted with an organization whose cash flow projections swung dramatically from report to report. One month the cash projection would show months of cash on hand . The next month the same report would indicate an urgent need to borrow. This sort of inconsistency is a sign that the report preparation process is broken, and the Board cannot rely on the financial information it receives from the finance team. In this case, the Board should consider an independent assessment of the reporting process.
3. FINANCIAL REPORTS CANNOT BE UNDERSTOOD – Financial reports should clearly show the financial capacity of the organization and how the organization is doing compared to plan and compared to prior years. If these key performance indicators cannot be seen at a glance, Board reports are too detailed and need to be simplified or summarized.
4. VARIANCES FROM BUDGET CANNOT BE REASONABLY EXPLAINED – There are many reasons why financial performance may differ from plan. Reasons include program expansion or contraction, changes in funding levels, and environmental changes. If the staff cannot provide a logical reason for a significant variance from budget, this is a sign of either accounting errors or misuse of funds.
5. EXECUTIVE DIRECTOR DOES NOT PERMIT BOARD CONTACT WITH OTHER STAFF – Senior staff should have direct lines of communication with their associated committee chair to discuss critical issues in their function. For example, the Development Director should meet regularly with the chair of the Fundraising Committee to discuss goals, performance, and Board reports. Executive Directors who act as a single point of contact with the Board may be preventing critical governance issues from reaching the very individuals charged with governance. However, the type of communication senior staff has with the Board should be clearly defined to avoid overloading Board members.
6. FINANCIAL STAFF NEVER TAKES A VACATION – Who doesn’t like to take a vacation? Only people who are afraid that the wheels will come off the bus while they are away. If the finance department cannot continue to function in the absence of a key staff member, this is a sign of poorly designed financial processes and poor staff training. It may also be a sign that the vacation avoider is afraid something that has been hidden will come into the open while they are away.
7. FINANCIAL STAFF CHOOSES THE AUDITOR – An inherent conflict of interest exists when the Chief Financial Officer or Executive Director chooses the auditor. Human nature makes us all crave positive evaluation of our work. A CFO or ED may be inclined to choose an auditor who is more likely to overlook financial shortcomings. Staff may recommend an auditor, but the Finance or Audit Committee of the Board should direct the selection process.
8. AUDITOR DOES NOT MEET WITH BOARD – For New York nonprofits required to have an annual audit, the Nonprofit Revitalization Act requires that the Board meet with the auditor twice: before the audit to understand the audit goals and activities and again afterward to review the results. For nonprofits anywhere, failure to have these meetings leaves the Board without the knowledge required to exercise its fiduciary duty to safeguard the organization’s assets.
9. BOARD DOES NOT REVIEW IRS FORM 990 – To many, reviewing a government filing is about as enticing as a root canal. Indeed, parts of the form are deathly dull. However, the 990 also contains information critical to Board governance such as whether the organization continues to qualify as a public charity, key employee salary disclosures, and the ratio of administrative to total expenses. In addition, one question on the form asks whether the Board has reviewed the 990 prior to filing. Avoid the embarrassment of a funder asking why the Board wasn’t interested in exercising this fiduciary duty.
10. EXECUTIVE DIRECTOR CHOOSES BOARD MEMBERS – To effectively perform its fiduciary duty, the Board must be independent from the staff. If the Executive Director chooses the Board members, the Board is dependent on the staff. Potential Board members should be identified, recruited, and recommended to the full Board for approval by a nominating or governance committee of the Board. Staff may recommend candidates to the Board, but the Board should control the process.
Paul Konigstein is a Senior Consultant at Accounting Management Solutions, helping nonprofits improve their finance, accounting, and governance. Paul is equally comfortable as an interim Chief Financial Officer or as an adviser for a specific project. Before joining AMS, Paul spent over twenty years as a nonprofit financial executive with arts and culture, education, and international development organizations including Helen Keller International, the New York Hall of Science, and the Metropolitan Opera. Outside the office, Paul is the former Board Treasurer for The Animation Project, which transforms the lives of at risk youth using digital art technology as a therapeutic medium and a workforce development tool. BoardAssist brought Paul and The Animation Project together.