Commentary: Good governance, best practices for nonprofits

Daily Record (Rochester, NY), Oct 17, 2008 by Michelle M Cain

Although initially challenged for delving into the realm of governance, the IRS has defended its position to obtain management and governance information in the new Form 990, based on its responsibility to properly administer the tax laws.

The IRS believes a well governed organization is more likely to be in compliance with the tax laws. That hypothesis even can be tested through a checklist, used to evaluate the results of examinations to determine whether better governance and management would have prevented abuses that might be found upon an organization's examination.

The new Form 990 has an entire section devoted to "Governance, Management and Disclosure." The basis for the inclusion of such information is documented in the IRS Governance Paper that provides best practices for 501(c)(3) organizations:

Governing body

All organizations can benefit from an active and engaged board. Best practices now state that a board should be "right-sized."

A board that is too big can be cumbersome; one that is too small may not be representative of the public. Most significantly, the board should be relatively independent. If the board is made up entirely of individuals who are not independent of the organization, decision-making may become difficult due to the many conflicts of interest.

Executive compensation

One of the key roles of the governing board is to review the compensation of key employees. The IRS encourages nonprofits to go through a process to determine reasonable compensation. In fact, the new Form 990 asks all organizations whether there is a policy for determining the compensation of officers and key employees, consisting of approval by independent persons who compare data, then substantiate the deliberation and the decision.

Conflicts of interest

Conflicts of interest arise when decisions are made by persons with interests that compete with those of the organization. The IRS encourages nonprofits to adopt a written conflict of interest policy that requires individuals to act solely in the interest of the organization, not for their own personal interests. The policy should be evaluated regularly, identify potential conflicts and require a course of action when a conflict is identified.

Investments

More and more nonprofits are entering into complicated and sophisticated investments that require the expertise of investment advisors. The IRS suggests organizations establish written investment policies that protect the assets of the organization, and that compensation of investment advisors should be reasonable. Also, when an organization enters into a joint venture with a for-profit entity, the agreement should include provisions that allow the organization to safeguard its assets.

Fundraising

Fundraising should be done in compliance with federal and state laws. The IRS believes fundraising costs should be kept reasonable.

Governing body minutes

and records

The IRS encourages records to be kept of a governing body's deliberations, and of any committees with the authority to act on behalf of the board. Form 990 includes questions pertaining to such records.

Document retention policy

Organizations should establish written document retention policies that cover integrity, retention and destruction of documents. Policies also must be established on e-mail. The IRS recently published IRS Pub. 4221, Compliance Guide for 501(c)(3) Tax- Exempt Organizations, which provides valuable information regarding how long certain documents should be kept.

Ethics and whistleblower policies

The IRS encourages organizations to adopt a code of ethics that communicates and furthers a culture of legal compliance as well as a whistleblower policy for confidentially handling employee complaints and reporting suspected impropriety or misuse of the organizations' resources. The new Form 990 asks whether an organization became aware during the year of a material diversion of its assets.

Financial statements and

Form 990 reporting

The IRS encourages organizations to have audited financial statements and audit committees to oversee the independence and competence of the auditors. Also, the IRS encourages the board of directors, in full or in part, to review the Form 990 before it is filed as part of their regular oversight duties. The new form inquires as to whether it was provided to the organization's governing body before it was filed as well as the process used to review it.

Transparency and accountability

Certain documents must be made available for public inspection including applications for exemption, Forms 990 and 990-T for 501(c)(3) organizations. In addition, the new Form 990 asks whether and how an organization makes available to the public its governing documents, conflicts of interest policy and financial statements.

Michelle M. Cain, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP. She can be reached at Mcain@mmb-co.com