Author: Nick Michael

KT Insights
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Legal Duties of Nonprofit Board Members

Nonprofit organizations depend on the dedication and ethical conduct of their board members to achieve their missions effectively. Nonprofit board members are entrusted with three fundamental legal duties: duty of care, duty of loyalty, and duty of obedience.

Duty of Care

The duty of care requires board members to conduct the affairs of the organization in the way a prudent person would. Board members are expected to make reasonable and sound judgements. This includes but is not limited to attending board meetings regularly and preparing thoroughly for discussions and important decisions.

Duty of Loyalty

The duty of loyalty requires board members to prioritize the nonprofit’s interests above their own. This duty encompasses disclosing any conflicts of interest and abstaining from decisions where personal interests may conflict with those of the organization.

Upholding confidentiality and never using insider information for personal gain are integral to fulfilling this duty. A robust conflict of interest policy is essential to managing these ethical considerations transparently.

Duty of Obedience

The duty of obedience requires board members to be faithful to the mission of the organization. It is the board’s responsibility to ensure compliance with all applicable laws and regulations. This includes honoring donor intentions and avoiding actions that deviate from the organization’s stated mission or legal obligations.

To effectively fulfill these duties, nonprofit board members should stay informed of emerging challenges relevant to the organization’s mission, legal obligations, and best practices in nonprofit governance.

November 7, 2024
| Nick Michael
KT Insights
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Nonprofit Board Composition, Terms & Committees

A strong nonprofit board is essential to accomplishing organizational objectives. Here are some important reminders and advice to support the success of your nonprofit board.

Board Composition

The intention is to have a diverse board with expertise in different areas and community representation. To accomplish this, it is recommended that at least two-thirds of board members are independent. This allows board members to bring perspectives that are untethered by financial ties.

Number of Volunteers

A nonprofit board cannot be less than three members per SDCL 47-23-14. Generally, the size of an organization’s board will depend on the type and complexity of the organization. Having a balance is key as too many board members may make it difficult to schedule meetings, make concise decisions, and engage all members. A smaller board may restrict community representation and the ability to provide effective oversight. Overall, a minimum of five members is recommended with the average number of members being 15.

Terms

While there is no requirement to have set terms, they may be established in organizational articles of incorporation or bylaws. In setting or revising existing terms, consider the need for historical organizational knowledge, established networking relationships with the community, new ideas additional board members can bring, and time required for the position to minimize burnout. Industry practice is one to three-year terms for nonprofit board members.

Recruitment and Orientation

It is difficult finding those members of the community who want to donate their time and have the expertise in areas your board is looking for. For the best success at retaining new board members, we recommend setting expectations early and in writing to include number of annual meetings, personal financial contribution requirements, number of committees and special events with board participation, process for nomination and selection of board committees, etc.

Furthermore, we recommend in depth discussions to ensure they are a right fit for your organization to include the organization’s mission, business plan, overview of major programs and operations, organizational policies and procedures, financials, and Form 990.

When new board members accept positions, consider formal training and assigning them to a veteran board member to serve as a mentor.

Committees

Delegating detailed tasks to committees, like Finance or Audit, can help streamline operations while maintaining board oversight. Committee structures should align with a nonprofit’s specific needs and complexity. Remember, the work of the committee does not alleviate the entire board’s responsibility to the organization.

If your organization needs assistance with board member training, you can contact us anytime!

October 29, 2024
| Nick Michael
KT Insights
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Fraud Post-Pandemic Rise: Why it Matters to You

According to a recent survey from the Association of Certified Fraud Examiners (ACFE) and Grant Thornton, LLP, there has been a 51% increase in uncovered fraud since the onset of the pandemic and 71% of respondents anticipate fraud to increase over the next 12 months.

Organizations typically face three categories of fraud which include corruption, misappropriation of assets, and financial statement fraud. The most common is misappropriation of assets which represents 86% of all fraud cases, according to the 2020 Report to the Nations conducted by the ACFE. Misappropriation of assets is classified as the theft of organizational cash and assets. It can be as simple as taking cash from the register or as complex as shell company billing schemes. Also noted in the 2020 Report to the Nations, the most common misappropriation of assets schemes are billing (20%), noncash (18%), and expense reimbursement (14%). There are different techniques used by fraudsters within each of these schemes. Some fraudsters submit invoices from false companies for goods and services never received in the hopes they will be paid, while some employees will turn in duplicate expense receipts for reimbursement and other will create false sales of inventory items to themselves or an accomplice.

So why does this matter to you and your organization? The 2020 Report to the Nations estimated 5% of all revenue globally is lost to fraud. Still think this doesn’t matter to your organization? Fraud happens in western South Dakota too. In my experience with Ketel Thorstenson, LLP, I have worked on several fraud cases and have heard about twice as many. Pick up a local newspaper, and I bet you will see an article about fraud.

Fortunately, there are ways to protect your organization from fraud and it is accomplished through effective internal controls. Controls surrounding cash receipts, cash disbursements, and assets susceptible to theft (inventory) are a great way to protect your organization from fraud. Reviewing the bank statement and credit card statement for propriety of deposits and withdrawals is an excellent way to detect fraudulent activity. Separating duties is a great way to prevent fraud as the employee who oversees the organization check stock is less likely to commit fraud if a different employee is the authorized check signor. Lastly, we have all heard it, but it stands true, the employee whose lifestyle is extravagant for their income, may be committing fraud.

As the saying goes, trust your business associates but verify what they provide and tell you. Reach out to the KTLLP team with any questions.

July 14, 2021
| Nick Michael
KT Insights
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Audits, Reviews and Compilations: What’s the difference?

To anyone new to the accounting world or anyone trying to decide what service is right for them, the difference between audits, reviews and compilations can be confusing. Adding to the confusion, some organizations are required to have an audit or review due to grant funding or debt agreements.

Essentially, the difference comes down to the level of assurance provided by each service with audits providing the most assurance and compilations providing no assurance. Assurance can be described as the degree of investigation and subsequent validation of balances within the financial statements. The following are the general characteristics of the three services to help further understand them.

Audits:

Goal: The goal of a financial statement audit is to provide reasonable assurance the financial statements are free from material misstatement and are fairly present based on the application of generally accepted accounting principles.  Based on these goals, it begs the questions of “what is a material misstatement” and “what is reasonable assurance?” A material misstatement is an inaccuracy in the financial statements that could impact the decisions of the financial statement users. Reasonable assurance is not absolute but means there is a substantial likelihood the financial statements do not contain a material misstatement.

Procedures: Audit procedures may include internal controls testing, substantive testing and analytical procedures. Perhaps the best way to differentiate them is through examples. In a control test, the auditor is examining the control the organization has in place and if the control is operating as designed. For instance, a control at an organization might be the CFO or CEO are the only authorized check signers. To test the control, the auditor may take a sample of signed checks and examine if they were signed by the appropriate person.

A substantive test deals with dollar amounts.  For example, confirming balances with outside parties or testing selected expenses by examining supporting invoices.

Analytical procedures involve evaluating organizational trends over time or a benchmark. An auditor may perform an analytical procedure on payroll expenses to test the reasonableness of the expense from year to year. The auditor may see a substantial increase in payroll expense from the previous year and investigate why the increase occurred.

Reviews:

Goal: Reviews are not as in depth as an audit. The goal of a review is to provide limited assurance that no material modifications to the financial statements are necessary to be in conformity with generally accepted accounting principles.

Procedures: As reviews are less in scope than audits, they only consist of analytical procedures and inquiries. Inquiries are simply asking questions about balances within the financial statements. See discussion above on analytical procedures.

Compilation:

Goal:  The goal of a compilation is to take financial data provided by an organization and prepare financial statements that comply with general accepted accounting principles. A compilation provides no assurance on the financial statements.

Procedures: Since compilations provide no assurance, there is no testing or analytical procedures performed.  During a compilation, general inquiries and knowledge of the organization industry are used to determine there are no obvious material errors.

Bottom line, audits use the most comprehensive procedures, reviews provide limited assurance, and compilations provide no assurance. It is not uncommon for creditors or grantors to require organization to have an audit, review or compilation. Governing boards may also elect to complete one of these services.

For questions or additional information, please contact any member of the nonprofit team at Ketel Thorstenson LLP.

December 4, 2019
| Nick Michael