At this point in my life I have sat on the Board of Directors for several different non-profit organizations. With each of these organizations there is always an agenda item entitled “financial report”. When this item comes up on the agenda each person at the table flips their packet to a series of pages that contains financial figures. The financial report is usually given by the treasurer or finance director to the Board. If you watch some of the Board members during the presentation, you will start to see eye’s glaze over, or attention turn to other things. Financial reports are often pretty boring. Most Board members just want to know if the organization is making money, and if it is not, where is it losing money? This misguided approach has ruined many non-profits through embezzlements and poor management.
Poor Financial Management
There is an abundance of financial management software programs available for an organization to use to track its spending and income. At this point, there really is no excuse to not be using something, even if it is just an excel spreadsheet. This organization was pretty small and was operated by “officers” and “members”. One of the members was elected/appointed as treasurer for the organization. The treasurer was responsible for collecting dues from members and paying whatever expenses came into the organization.
Because the treasurer was lazy, and it was a small organization, the treasurer did not track anything, let alone use a program to do so. The financial report at meetings consisted of the treasurer telling members who had paid their dues, and which had not. Of course, there were often arguments from members that were identified as not having paid dues as they stated they had paid. If a member was adamant enough that they had paid their dues, the treasurer would mark them down as paid, even if they had not paid. When it came to expenses there were no procedures to track or reconcile accounts. Nobody, let alone the treasurer, knew how much money the organization had.
We began by running a three-year financial review using bank statements. What we found was that during this period the organization had lost over $5,000.00 simply because they were not tracking their revenue and expenses. We immediately set them up with a Quickbooks file, and then setup internal controls. All deposits were copied prior to going to the bank. Copies of all outgoing checks were made prior to being paid to the recipient. Expense reimbursements had to be submitted and approved by the Officers prior to a check being issued. Members were formally invoiced for dues and payments were tracked. A budget was also created to help monitor spending.
At last check this organization was running a healthy profit that could be used to support programs in its community. We maintain our position as an outside resource that the Officers can use to help ensure that they are operating appropriately.
Executive Director Gone Wild
At one organization’s monthly Board of Director’s meeting the Executive Director informed the Board that the organization needed to change the way they operated. Their organization received a directive from a federally funded program that they had to change the way their organization operated in regards to its mission. In order to fund this change of program and save funds the Executive Director convinced the Board of Directors that they should remove their outsourced accounting oversight and allow the Executive Director to perform those functions, even though the Executive Director had no training or knowledge to do so. As you can guess, the Board immediately fell for this tactic.
Want to guess what else happened? That’s right, without oversight the Executive Director embezzled over $700,000.00 from the organization, right under the noses of the Board of Directors. This embezzlement made the front page of the local newspaper, and for other reasons, was picked up by national media. Because the embezzlement involved federal funds the Executive Director was prosecuted in federal court with federal felony charges.
Why did the Board of Directors allow for the removal of oversight? This particular Board of Directors is not made up of financially minded, or business management professionals. In fact, this Board was made up of politicians, government employees and one banker. The one person that understood finance relied solely on the outsourced accountant for all financial related issues.
Not only is the organization out over $700,000.00 that could go to help the people in their community that need it, they are also out over $150,000.00 in legal fees related to the investigation and prosecution of their former Executive Director. Not mention, the reputation of the organization and its Board of Directors is forever tarnished in their community.
Ministry, it’s all in the Family
Unlike many small businesses, non-profit Boards of Directors should not include a majority of members related by blood, marriage or common business interest. We ran across a religious non-profit organization where all the Board members were related by blood or marriage.
While the purpose of the organization was religious in nature, and over all they did operate with a true religious purpose, they needed to add Board members that were not related. Because there was no outside oversight the Board/Family operated the non-profit organizations bank account as their household/family bank account.
No family/board member was receiving a paycheck. If they needed to purchase groceries or pay their mortgage, the funds were pulled from the non-profit organization bank account. This activity pierced the corporate veil and if reported to the Internal Revenue Service would cause them to lose their non-profit entity.
While the family hated to hear this, they moved forward with setting up separate bank accounts and receiving pay checks. They also began recruiting for Board members that were not related to them. They also removed all but one family member from the Board.
We cannot stress enough that non-profit organizations need to engage legal and accounting oversight to ensure that they are operating within the guidelines that have been established for their organization. Even though you surely have the best of intentions, the guidelines have been established for a purpose. They are not there to penalize or make things difficult. They are there to ensure a level playing field and that the benefits that are afforded to non-profits are not exploited by unethical individuals.