Fiduciary Magazine » 501(c)

Figuring Out What Counts

Ana LaDou — Mon, 22 Feb 2010 23:21:04 +0000

Not everything that can be counted counts, and not everything that counts can be counted. – Einstein.

Just because numbers seem factual, in the sense that one plus one equals two and so two must be true, that doesn’t mean that they tell the whole story or that they tell the real story. There has been a push these last few years for accountability and transparency in all business sectors, in most cases the transparency is about what can be counted. Sometimes this push makes financial statements even harder to understand as nonprofits work to find ways to tell an honest story with numbers alone.

The assumption by the government seems to be that ‘everything that can be counted counts’. I’m with Einstein on this one because numbers can be misleading and definitely don’t tell the whole story, not everything that can be counted (chart of accounts) ‘counts’. One cannot assume that an organization is healthy and thriving because it has money in the bank or spends a little (or a lot) on any particular line item. As a matter of fact, just because the amounts are listed on the chart of accounts, it doesn’t mean that it tells the whole story, or even part of the story, of an organization. The chart of accounts includes everything that can be counted, that doesn’t mean that’s all that is relevant.

“Everything that counts can be counted.” Often the board (well, and the public) take this new transparency of numbers to mean that the numbers reported are important. Not just important, but they could possibly tell the whole story…that the numbers are everything. Although I can learn a lot from the balance sheet and budget of a non profit, I can’t learn everything there, as too many things that ‘count’ that are not listed on a balance sheet or budget.

No one person or company can be understood exclusively from looking at their numbers. If you were to look at my bank statement and make decisions about who I am based on those numbers they would tell you a lot. About where I shop. What they wouldn’t necessarily tell you is what I value, how I spend my time when I’m not spending money, who I love, what my goals and dreams are. They would only tell you what I value that is for sale, like clothes and organic produce. It wouldn’t tell you that I don’t have a television, that I’m wicked good at Bananagrams, that I stay up until all hours of the night some nights making art. So, my bills would give you a window into me, but not a very big one. The only way to learn about me is to get to know me. Same for an organization.

What counts in an organization, especially a non profit, is its impact. Exploring an organization’s impact can be challenging. Don’t rely upon numbers alone. First, most people don’t really read them, and second, they don’t tell you everything you need to know. Some things are only learned by attending board meetings and seeing the programs in action. Decide what counts to you and give to that cause. Complaining never got anyone any closer to a solution, action does. Giving money can be a noble action, especially when you’ve done your research and your heart is in it. Give because it will make YOU feel better about the community you live in.

Similar Posts:

Overlooking Oversight

Ana LaDou — Thu, 11 Feb 2010 06:36:47 +0000

The nonprofit sector is under more scrutiny today than at any time in our history, and yet detailed 990s and audits don’t guarantee that oversight is happening. Why is that? There are as many answers to this question as there are charities, but there are some things that seem to crop up again and again when problems arise. Here are some key reasons why oversight is overlooked:

1. No one wants to admit that oversight didn’t happen in the past so there is never a good time to ‘start’. In other words, things keep getting done the way they have always been done. Pieces of paper get signed and filed, but there isn’t willingness to revolutionize the way the organization does business.

2. Even when there are losses it is usually looked at as an ‘event’. Rarely are governance practices put in place that would prevent it from happening again because the root of the ‘event’ isn’t researched. Everyone points the finger at the ‘event’ and then moves on with only cursory changes, if any.

3. Often everyone will agree at a committee or board meeting that something is wrong with how they are working, but then the topic is never brought up again.

Why do these things happen? From an outsider’s point of view, the changes seem easy and painless enough, so why aren’t they made? Why don’t companies, and especially non profits who are given so much trust by the community, jump at the opportunity to run more efficiently and effectively?

Because change hurts. It’s difficult; it is an ongoing process – not a one time solution; sometimes it makes things worse; and it can make you wish you’d never had any issues in the first place. We are wistful about how life used to be (before we changed) and yet change is a given. Sweeping things under the carpet is always easier. Changing in crisis when there’s no other choice in some ways is easier because we don’t have to ‘decide’ to change, it is thrust upon us.

If change is so hard, what are the other options? Frankly, there aren’t any. Either companies get with the program and start moving with the times or they will in a few years find themselves quite suddenly out of business. It’s a tough economy out there and nonprofits that don’t change may find that if they wait too long, it’s too late.

Often the board’s first reaction to change is that they do need to do some change, but not too much. The idea of changing puts everyone ill at ease and there is fear that things could get worse; that change in and of itself could threaten the organization. Most boards realize that they need to embrace new ways of doing business, both to be compliant with laws and also to draw in new members.

I understand that no one wants to be Chicken Little. It’s human nature to want to be accepted and to be a part of the group — and nothing sets you apart like questioning leadership. But in today’s economy change is critical to the success of your organization. The bravery of being willing to stand out by asking questions and demanding changes ensures that you won’t fall into the dangerous habit of overlooking oversight.Similar Posts:

What are the Myths in Budgets?

Ana LaDou — Thu, 27 Aug 2009 05:05:41 +0000

No matter how many people I speak with or stories of success I hear, the true health of an organization can only be assessed through their financials. Like reading a mystery novel, the story comes to light slowly, and sometimes surprisingly, as things aren’t always as they seem. Some people look at budgets like diets, something to strive for as opposed to a practical plan to follow. So are budgets myths developed to tell donors and board members what they want to hear? While that is surely overstating the situation in most cases, enough for-profit and public companies have had trouble due to the myths of their budgeting processes that it is a worthwhile question to ask in the non profit sector as well.

When assessing an organization, there are multiple financials to read: Audits, Quickbooks files, Budgets, etc.. Each of them will tell a slightly different story because each is looking at the organization from a different point of view. Usually budgets are very accurate and I have developed great faith in them as compasses that can inform me about the direction an organization is heading. They are like a strategy document in numbers.

There are telltale signs that proper due diligence was done in the budget preparation and that it honestly states the outlook for the coming year. I worked with someone years ago who wouldn’t approve a budget with any round numbers in it. Perhaps that sounds a bit strict, but he believed that round numbers meant we hadn’t done the math because bills don’t come in nice round numbers. Real bills usually end in one and three and six but rarely zero. So now if I’m looking at a budget with all round numbers I too worry that there’s way too much guesswork on the page and not enough reality.

Also, when I’m looking at the projected budget for the coming year, I like to see the Variance to Budget statement from the year before. This will tell me how budgets and fundraising have been done in the past. Have they always budgeted in round numbers? Were they accurate? Looking at the previous year’s budget will give an accurate frame of reference for their fundraising goals. For example, a new budget may say that they anticipate raising two hundred thousand dollars online. But if they only raised two thousand dollars last year online, then it’s a red flag. Numbers that jump without good cause may mean that the budget is more fantasy than reality.

It’s easy to make a fantasy budget that says everything will cost less this year and donors will give more. Reality budgets however will always have something in them that will give you pause. Reality is like that. I expect explanations for how they arrived at these numbers in the form of a detailed spreadsheet which includes a brief sentence for each line item that varies from the year before.

Budgets rarely vary wildly, and if the one you are looking at does, it needs to accompany a written document that spells out why. To be sure, staff is not alone in shifting budgets around. Often a board will demand that numbers ‘match’. I won’t speculate on why, except to say we all like to think that money in and money out should be the same. But lying on a budget is like lying on a diet. You can say what you want on paper but if you’re eating cupcakes for breakfast every day and not exercising, you’re going to get fat. Try to be realistic. If you aren’t, then you’re doing a disservice to yourself and to the organization.

Budgets are a great place to begin a conversation, but they are not the entirety of what needs to be said. Budgets can accurately point to where too much money is being spent and where not enough is being raised. A true assessment can lead to changes in governance and fundraising and ultimately strengthen the organization, allowing more funds to flow through to the mission, which is the ultimate goal. In my opinion, budgets are myths that encode the heart of the organization within their numbers.Similar Posts:

Three Key Things to Build Trust

Ana LaDou — Mon, 17 Aug 2009 18:30:28 +0000

Sitting on a board of directors is like building any new relationship. Even if your friends and business partners admire the organization, you must ask questions and dig in to learn about it for yourself. Remember, the more you know, reallyknow, about an organization, the more confidence and respect you will have for the way it is operating. That respect and confidence will lead to more funds and the ability to fundraise because you will not just be depending upon hearsay, you will fall in love with it on its own merit.

In order to govern responsibly you must understand all facets of the organization. The fastest and most accurate vision of a charity is through their finances. Never assume that everything must be ‘right’ with the organization just because of who else is sitting in the boardroom. Fiscal excellence is the responsibility of the entire board and cannot be assumed. You must bring the same diligence and care to the fiscal oversight in your charity work that you bring to your corporate work.

Here are three rules of thumb to build confidence and trust in your organization.

1. Get copies of the tax returns and financial audits from previous years. These should be downloadable from the internet and if they’re not, suggest that they should be.

2. Study the budgets for the current and previous year.

3. Read the bylaws and their accounting manual.

Fiscal responsibility and transparency are a key component to good governance. With these three basic steps you will learn where the organization has come from and where it stands today. Since you’ve asked for these documents and have reviewed them, you will be able to discuss any questions or irregularities with the ED/CEO and that person will think of you as someone who is not only financially literate, but interested. You will be in the small circle of people that they will seek out if and when trouble starts to brew and that’s exactly where you want to be. Through this conversation you are building trust, first with the organization and then in turn with the community.

Similar Posts:

IRS Issues New FAQs for Governance Portion of Form 990

Editor — Wed, 24 Jun 2009 18:48:12 +0000

By Douglas M. Mancino, et al.
Partner, McDermott Will & Emery

Tax-exempt organizations are well-advised to attribute significant focus and attention to the governance questions posed on Part VI of the Form 990, and to the underlying governance concepts raised by these questions.

On May 29, 2009, the Internal Revenue Service (IRS) posted a series of “FAQs” and other “Tips” associated with the completion of Part VI to the Form 990 (Governance, Management and Disclosure). Part VI is the section of the new, redesigned Form 990 that reflects the IRS’s major focus on the corporate governance of tax-exempt organizations. Thus, the new FAQs are likely to be welcome news to these organizations as they respond to the dramatic increase in governance-related questions in the new Form 990. The FAQs can be found here .

The FAQs contain 11 separate questions focused almost exclusively on Form 990, Part VI, Governance, Management and Disclosure. In the FAQs, the IRS makes it clear that many (if not all) of the policies and procedures about which it is asking in the Form 990 are not required under the law. Nonetheless, the IRS makes equally clear that, while none of the policies and procedures are required under the law, answering questions about whether the filing organization has adopted such policies and procedures on the Form 990 is required by law. While the IRS traditionally has not imposed penalties on failure to file substantially complete Form 990s in the past, it is an open question whether the IRS would pursue such path for an organization refusing to answer the governance questions on the current Form 990.

General Comments on Form 990 Part VI and the FAQs

Governance, in general, has become a pillar of the IRS enforcement and education programs for tax-exempt organizations. Given continued congressional scrutiny on whether tax exemption is a worthy federal subsidy for any type of tax-exempt organization, proper governance and accountability to the local community are key factors that may distinguish the tax-exempt sector from the taxable sector. From the IRS perspective, whether correct as a matter of law or not, the answers to the questions contained in Form 990, Part VI, are significant with respect to continued tax-exempt status for most tax-exempt organizations.

The FAQs may be loosely grouped into two main categories: FAQs relating to the existence of written policies on conflicts of interest, whistleblowers and document retention, and FAQs relating to whether information from organizations related to the filing organization is required to be included in the Form 990. Set forth below are discussions of the more important FAQs for filing organizations.

FAQs on Policies and Procedures

FAQ #10
Form 990, Part VI-B, asks whether the filing organization has adopted a written conflict of interest policy (Part VI-B, Question 12a), a written whistleblower policy (Part VI-B, Question 13), and a written document retention policy (Part VI-B, Question 14). FAQ #10 clarifies that, in responding to these questions, a filing organization may not rely on the fact that its parent organization may have adopted such policies even if the filing organization is acting pursuant to the parent organization’s policies. Instead, a filing organization may only indicate that it has such policies if it has expressly adopted such written policies itself. Presumably, expressly adopting the parent organization’s policies should be sufficient to allow the filing organization to check “yes” in response to the applicable questions. As in many other parts of the Form 990, the IRS notes that the filing organization has the ability to discuss any special circumstances on Schedule O.

FAQ #3
FAQ #3 clarifies that, for purposes of reporting whether the filing organization has adopted a particular written policy or procedure (e.g., conflict of interest policy), it may only answer “yes” (i.e., that it has adopted such policy) if it adopted such policy prior to the close of the reporting year. In other words, if the filing organization adopted a policy after the close of its reporting year but before it filed the Form 990 for such year, it must still answer that it does not have such policy. Again, Schedule O may be used to explain that the organization has adopted such policies after the close of the reporting year.

FAQ #8
In FAQ #8, the IRS notes that it will not provide sample policies for filing organizations (even though it did so with respect to the IRS Model Conflict of Interest Policy in the late 1990s).

FAQ #5
FAQ #5 notes that there is no legal requirement for a tax-exempt organization to show the Form 990 to its board but, nonetheless, notes that the filing organization must indicate whether it has done so in the Form 990.

FAQs on Activities of Related Organizations

FAQ #7
FAQ #7 attempts to clarify the level of effort needed by filing organizations to ascertain information regarding independent directors and family relationships among board members. However, the only guidance provided by the FAQ is that “reasonable efforts” must be made. The IRS notes that a simple questionnaire that includes the name, title of person responding, date and signature, and attaches the Form 990 Glossary definitions of “independent voting member of governing body,” “family relationship,” “business relationship” and “key employee” may be all that is needed.

Practice Note: While the IRS suggests the use of a very simplified questionnaire, it is possible that a limited questionnaire may not capture all the information required to complete Part IV, question 28, regarding business relationships among directors, officers, key employees and their family members. In addition, such a simplistic questionnaire may cause greater problems for the filing organization by requiring greater diligence in educating board members and officers as to what information is required to be provided and by placing a greater burden on the filing organization’s general counsel or compliance officer to make certain that questionnaires were completed accurately. In other words, in preparing responses to Form 990 Part VI, Questions 1 and 2, the organization should be careful in following the IRS guidance in these FAQs and should consider using a more detailed questionnaire that is designed to more fully collect the appropriate information for all parts of the Form 990. Organizations will have to balance the need for information against the administrative inconvenience.

FAQ # 6
FAQ #6 attempts to clarify the IRS’s three-part definition of “independent director” by indicating that the filing organization must use the three-part definition of “independent member” contained in the Form 990 instructions even if that definition is in conflict with state law definitions of independent members or in conflict with the filing organization’s definition of independent member in its conflict of interest policy.

Practice Note: Addressing issues of “independence” may trigger some controversy at the board level given the difference between the IRS definition of “independent” director and state law definitions of the same; potential confusion between application of the “independence” and “conflict concepts;” and potential confusion between “independence,” “conflicts” and “disinterested director” (for rebuttable presumption) concepts. In addition, application of the IRS definition of “independent” director could prompt a restructuring of the board in order to ensure independent control.

FAQ #4
FAQ #4 only applies to filing organizations that have members or that have local chapters, branches or affiliates. The purpose of this FAQ was not to provide additional instruction to filing organizations but, instead, merely to explain why the IRS included questions on members and local chapters, branches and affiliates in the first place.

FAQ #9
FAQ #9 discusses whether the filing organization must provide governance information regarding its related organizations. The IRS indicates that, as a general rule, the answer is no.

Practice Note: While it is not generally required, there are many situations where a filing organization should provide information about the governance of related organizations. For example, many health care organizations may not have “independent” boards (as defined in the Form 990) because they are controlled by a tax-exempt organization that has a community (i.e., independent) board. This structure has been expressly approved in IRS guidance regarding community-based boards and exemption. See, “Tax-Exempt Health Care Organizations Community Board And Conflicts Of Interest Policy,” 1997 Exempt Organizations Continuing Professional Education Text at 21, which may be found here. Unfortunately, Part VI of Form 990 fails to recognize that as a possible structure. For these filing organizations, Schedule O is the only place in Form 990 where they may describe the existence of the community (and independent) board at the parent level.

Further, many exempt organizations are exempt under the so-called integral part theory of exemption, which looks to the activities of related organizations to justify their own exemption. In isolation, these integral part organizations may appear less charitable than other exempt organizations since their exempt status is derived from another entity. Schedule O presents an opportunity for these organizations to explain the full array of charitable activities provided by the tax-exempt system. Similarly, Schedule O may be used to report community benefits provided by other tax-exempt entities within the filing organization’s tax-exempt system, to more accurately portray the true scope of activities being conducted by the filing organization’s family of tax-exempt organizations.

Discussion

Part VI to the Form 990 and the issuance of these FAQs underscore the importance that the IRS attributes to effective corporate governance by tax-exempt organizations. Over the last several years, IRS officials have repeatedly expressed their belief that the existence of an independent governing board, combined with well-designed governance and management policies and procedures, increases the likelihood that an organization will comply with the tax laws. To that end, the promotion of good governance, management and accountability has become a new “pillar” of the IRS’s compliance program for the tax-exempt sector. Furthermore, governance accountability is an important feature distinguishing the nonprofit model from the for-profit model for purposes of hospital tax exempt status.

There is no explicit statement of IRS jurisdiction over corporate governance of tax-exempt organizations in either the Internal Revenue Code or the associated Treasury Regulations. Rather, the IRS focus on governance is based upon what it refers to as “implicit jurisdiction,” i.e., the concept that the quality of governance affects all aspects of the IRS’s oversight over exempt organizations—furtherance of exempt purposes, private inurement, excess private benefit, reasonable compensation, informed and fair decision making regarding investments and fundraising practices, and self dealing. Furthermore, principles of good governance by nonprofit organizations are actively enforced by state charity officials, such as the attorney general, and actively monitored by donors’ rights organizations. Effective corporate governance is also favorably recognized in the credit rating analysis process.

While one can argue that the IRS is overreaching in prescribing specific governance procedures, tax-exempt organizations are well-advised to attribute significant focus and attention to the governance questions posed on Part VI of the Form 990, and to the underlying governance concepts raised by those questions. In that regard, these newly released FAQs offer helpful guidance.

Here is a link to the full article at McDermott Will & Emery.Similar Posts:

Mid-Year Portfolio Review

Editor — Wed, 17 Jun 2009 07:00:50 +0000

It should be written in your Investment Policy Statement (IPS) that you have frequent portfolio reviews. Morningstar has a good article on a few things that you can include in that review.

Click for the article

Similar Posts:

NFL Plays Hand in merger of Retired Players Groups

Editor — Fri, 12 Jun 2009 04:51:08 +0000

While new NFL Players Association executive director DeMaurice Smith has been appealing to retired players in the months leading up to collective-bargaining talks, NFL commissioner Roger Goodell already was involved in the formation of a new retired players group, the NFL Alumni Association, that seeks to speak for all former players.

An executive for the group sees the possibility of a role for the group in collective-bargaining agreement talks.

The group was formed after Goodell held a meeting in the league’s offices with board members of NFL Alumni Inc., a charity that long received league funding. Goodell raised the subject of a merger with retired players group Fourth and Goal and set up a conference call between leaders of the two groups, according to two NFL Alumni Inc. executives.

“Roger Goodell approached the NFL Alumni about merging with Fourth and Goal,” said Frank Krauser, CEO of NFL Alumni Inc. “The guys going into the meeting didn’t know this was going to be discussed.”

Lee Nystrom, chairman of NFL Alumni Inc., said he and another board member, Randy Minniear, met with Goodell in the league offices March 9. Goodell proposed that the merged group take on the expanded role of advocating for all retired players.

“The commissioner said, ‘I want to deal with one group.’ And he asked, ‘Would we be one group?’ ” Nystrom said.

NFL spokesman Greg Aiello said the idea for the merger came from Bruce Laird, founder of Fourth and Goal and an outspoken critic of the NFLPA in the past.

“Many other retired players at the meetings the commissioner had around the country with retired players spoke of having one organization to better represent their interests,” Aiello said. “So the concept, in fact, came from the retired players.”

Laird said he sent a letter to Goodell in February suggesting the retired players form one group and that NFL Alumni Inc. could be a part of it. But he said, “I did not know I was going to be on a conference call. I just got a call from Roger Goodell stating he was in a meeting with Lee Nystrom and Randy Minniear and he had just addressed this issue with them.”

In April, after the meeting with Goodell, NFL Alumni Inc. voted to form the Alumni Association and add Laird and five other retired players to its board.

NFL Alumni Inc. is a 501(c)(3) charity that has long received funding and other support from the NFL, but new NFL Alumni Association has been set up as a 501(c)(5) labor organization and might ask to be heard, if not have a seat, at the bargaining table, to speak for all former players during the talks for a new labor deal for active NFL players.

The new association also has formed a search committee to hire its first executive director.

“I can’t speculate on if and when … we will be invited to the table,” Nystrom said. “It wouldn’t surprise me if we will have the NFLPA and the NFL Alumni at the table at the same time.”

Labor lawyers said the retired players group does not have a legal right to be at the negotiating table since they are not members of the collective-bargaining unit.

Laird said he is in talks with NFL officials about funding and the ability to use the NFL Alumni shield for marketing and licensing purposes.

The formation of the new association comes after the NFLPA, especially under the leadership of the late Gene Upshaw, has endured withering criticism from retired players. Nystrom said, “If the PA would have done their job, the NFL Alumni would have remained a charitable organization only.”

Late last month, the NFLPA held a retired players meeting in Palm Springs, Calif., at the same time an independent group of retired players held a summit on former players’ issues in Las Vegas. Smith has taken a different approach to retired players than did Upshaw and told players at the Palm Springs meeting he represented all players, not just active players.

Although some retired players distrust the NFLPA, they are not sure they want the NFL Alumni Association to represent them, either, given the long-standing connection between NFL Alumni Inc. and the league and the fact Laird is actively seeking funding from the NFL. Some retired players also were questioning whether formation of the association was part of a plan to divide retired players during collective bargaining.

Reggie Berry, a retired player on the steering committee of the NFLPA’s Retired Players Association, the union’s group for former players, said the NFL and its owners “are using the Alumni Association” because collective bargaining with the active players is starting.

NFL owners “want former players to be on their side,” Berry said. “They want the retired players to say things like, ‘Active players are greedy.’ It’s divide and conquer.”

Laird gave a presentation to the retired players at the Las Vegas summit and urged them to join the new association, according to several players who attended.

Marvin Cobb, an organizer of the Las Vegas summit, said although Laird and the new alumni association had some support, the general consensus of the retired players was they wanted to remain independent, at least for now.

“The NFL Alumni joining with one of the advocacy groups, Fourth and Goal, puts Mr. Smith in a tight situation,” Cobb said. “It gives the appearance that retired players are aligning themselves with the league and the owners rather than with the players association. When has that ever happened, an independent advisory group joining forces with the owners? I always thought they were our opponent.”

Liz Mullen
SportsBusiness Journal

Similar Posts: