Table of Contents

Notice to Readers iii


About the Authors v


Preface vii


Acknowledgments ix


1 Increased Complexity and Mounting Challenges: Time to Prepare 1


Call to Action 6


Conclusion 6


2 Roles of the Board and Management 9


Governance in the 21st Century 10


Purpose of the Governing Board 11


Board Committees 12


Legal Responsibilities of the Board 13


Lesson Learned 13


Lesson Learned 13


Lesson Learned 14


IRS Form 990 and Governance 14


Frameworks for Good Governance 15


Panel on the Nonprofit Sector Framework—Good Governance Model 16


Legal Compliance and Public Disclosure 17


Effective Governance 20


Conclusion 30


Appendix A—Comparison of Key Objectives of the Board of Directors With the Good Governance Framework and Questions From IRS Form 990 32


Appendix B—Example Dashboard for Board Evaluation 35


Appendix C—Sample Board Self-Assessment Document 37


3 Legal and Ethical Imperatives for Leadership 39


Legal Accountability 40


Ethical Accountability 41


Who is Accountable for Accountability? 43


How to Instill Ethical and Legal Accountability 44


Honest Communications 44


Strong Relationships 44


Internal Controls 45


Clear Expectations 45


Skilled Boards 45


Involved and Informed Boards 45


Financial, Document, and Ethics Audits 45


Compliance Officers 46


Resolving Dilemmas 46


What About WholeHealth? 48


Conclusion 49


4 When Management and the Governing Board Disagree 51


The Head Game 52


Communication 53


Constructive Norms 55


Negotiation 57


Assisted Resolution 59


Conclusion 60


5 Understanding the Financial Statements of Nonprofit Organizations 61


Characteristics of Nonprofits 62


Responsibility for Financial Information 62


Basis of Presentation for Financial Information 63


Cash Basis of Accounting Versus Accrual Basis 63


Basic Financial Statements 64


Footnotes to the Financial Statements 65


Fund Accounting 66


Assets 70


Liquidity 70


Cash and Cash Equivalents 71


Revenue, Receivables, and Deferred Revenue 72


In-Kind Contributions 75


Long Term Contributions 76


Conditional Promises to Give 77


Endowments 78


Split Interest Agreements 79


Agency Transactions 81


Nonprofit Serves as a Conduit for Cash or Noncash Donations 81


Nonprofit Solicits Funds for Another Nonprofit Organization (Unrelated) 82


Nonprofit Holds Funds for Another Nonprofit Organization (Unrelated) 82


Nonprofit Enters Into Transactions With Related Foundations 83


Inventories 83


Prepaid Expenses and Investments 84


Alternative Investments 84


Property and Equipment 85


Liabilities 85


Accounts Payable and Accrued Expenses 85


Mortgages and Notes Payable 86


Net Assets 86


Revenues and Expenses 86


Conclusion 87


6 Risk Management 89


Some Risks Can Be Mitigated With Insurance 89


Cyber Risk—A Growing Threat 90


Risk in a Complex World 90


A Nonprofit’s Most Important Resource 91


Risk Management Approach 93


Enterprise Risk Management 93


ERM Component One 94


ERM Component Two 94


ERM Component Three 94


ERM Component Four 95


ERM Component Five 96


ERM Component Six 96


ERM Component Seven 99


Example Application of a Risk Management System to a Nonprofit Organization 99


ERM in Smaller Nonprofit Organizations 102


Risk Management Committee 103


Crisis Management 104


Revisiting Uncertainty 105


Conclusion 105


Appendix A—Risk Management Checklist 107


7 Internal Controls: What Every Executive and Board Member Needs to Know 113


Characteristics of Nonprofits 113


Internal Control Defined 114


COSO Framework Updated for Changing Times 115


Distinguishing Error From Fraud 116


Controls for Smaller Organizations 118


Elements of Internal Control 119


Control Activities 121


Designing a System of Internal Control 123


Entity Controls 123


Control Activities 127


Antifraud Programs and Controls 131


Misappropriation of Assets 131


Fraudulent Financial Reporting 132


Revenue Recognition and Management Override 132


Control Environment 133


Fraud Risk Assessment 133


Information and Communication 133


Monitoring 134


Billing Schemes, Check Tampering, and Expense Fraud 136


Use of Analytical Techniques to Identify Unusual Disbursement Transactions for Investigation 140


Skimming and Larceny 141


Payroll Fraud 143


Controls Over Noncash Items 146


When Processing is Outsourced 146


Cybersecurity and Not-for-Profits 147


Internal Controls Evolve 148


Conclusion 149


Appendix A—2013 COSO Framework 17 Principles—Summary 150


8 Focus on Tax-Exempt Status 155


Nonprofit Organizations and Tax-Exempt Status 156


IRS Filings 157


Differences Between Nonprofit and Commercial Organizations 158


Recognition of Tax-Exempt Status 162


Lobbying 164


Public Charity or Private Foundation 166


Public Support Test for Charitable Organizations 167


Test 1 (509(a)(1))—Compute the Public Support Percentage 168


Test 2 (509(a)(2))—Compute the Public Support Percentage 169


Supporting Organizations 170


Charitable Contributions 172


Filing Form 990 175


Unrelated Business Income 177


IRS Audits 179


Conclusion 180


Appendix A—Guide for the Board’s Review of Form 990 181


Appendix B—Important Filings for Tax-Exempt Organizations 185


Appendix C—Governance Policies and Procedures 188


9 The Courage to Lead 189


Moral Courage 189


Barriers to Ethical Action 191


Strategies for Ethical Action 194


Have a Clear Compass 194


Know Your Objective 195


Seek Advisers and Allies 195


Walk the Walk 196


Understand Change Strategies 196


Practice Considerate Communication 197


Conclusion 197


10 Change Management 199


Understanding Change 200


Be Clear About What You Want 202


Assess Before You Act 203


Create Awareness and Urgency 204


Create a Powerful Coalition 205


Communicate 207


Address Obstacles and Blockers 208


Create Short TermWins 210


Give People the Tools to Succeed 210


Solidify Changes 211


Suggestions for Sonja 212


Be Clear About What You Want 212


Assess Before You Act 212


Create Awareness and Urgency 213


Create a Powerful Coalition 214


Address Obstacles 214


Communicate 215


Create Short Term Wins 215


Give People the Tools to Succeed 215


Solidify Changes 215


Conclusion 215


11 Integration for Action 217


Case One: AWoman Scorned 217


Prevent 218


Address 219


Improve 220


Case Two: The Indeterminate Sentence 221


Prevent 222


Address 225


Improve 225


Case Three: Your Turn 226


Sustained Success 227


Conclusion 227


Glossary 229


Bibliography 235


Suggested Reading 239

About the Author

Founded in 1887, the American Institute of Certified Public Accountants (AICPA) represents the CPA and accounting profession nationally and globally regarding rule-making and standard-setting, and serves as an advocate before legislative bodies, public interest groups and other professional organizations. The AICPA develops standards for audits of private companies and other services by CPAs; provides educational guidance materials to its members; develops and grades the Uniform CPA Examination; and monitors and enforces compliance with the accounting profession's technical and ethical standards.
The AICPA's founding established accountancy as a profession distinguished by rigorous educational requirements, high professional standards, a strict code of professional ethics, a licensing status and a commitment to serving the public interest.