Refresher on Good Nonprofit Governance Practices
by Jill A. Shaw, CPA, Partner
Posted on January 7, 2014
The IRS believes well-governed nonprofit organizations are likely to be more compliant with tax laws, safeguard charitable assets, and serve charitable interests. As nonprofit organizations come under increased scrutiny by the public and the IRS, governance practices and policies are under the microscope.
In December 2009, the IRS issued Form 14114, a Governance Check Sheet, which is utilized by IRS field audit staff during audits of tax-exempt organizations. The Form can be found at http://www.irs.gov/pub/irstege/governance_check_sheet.pdf. Many of the questions on this Form are also questions on the Form 990.
The check sheet indicates that the IRS will be examining six areas related to governance:
1. Governing Body and Management
Nonprofit organizations should review their written mission statement periodically to ensure it clearly states their exempt purpose. The organization’s adherence to this purpose protects its tax-exempt status. In addition, the organization’s bylaws should address the composition, duties, qualifications and voting rights of the governing body and the organization should have policies in place to make such governing documents available to federal and state authorities, the governing body and the public upon request.
2. Compensation
Nonprofits should ensure that compensation to its officers, directors, trustees, key employees and other executives is reasonable. Some organizations accomplish this by engaging a third party to perform a compensation study. Another option is to conduct an in-house comparability study utilizing free guidance that can be found on websites like Guidestar (www.guidestar.org) or studies such as the Nonprofit Compensation and Benefits Report published by the ASU Lodestar Center (https://lodestar.asu.edu/research/nonprofitcompensation-and-benefits-report) which can be obtained for a small fee. Compensation arrangements should be approved by the governing body and documented in the meeting minutes.
3. Organizational Control
Organizations should have a balanced board that includes independent members to demonstrate that the organization is not overly influenced by individuals who are not independent due to family or business relationships. A diversified board will help ensure that the organization is a proper steward of charitable assets and decisions are made in the best interest of furthering the organization’s mission.
4. Conflict of Interest
Organizations should have a written conflict of interest policy that addresses recusals and requires annual written disclosures of conflicts. The organization should also regularly and consistently monitor and enforce compliance with the policy. The Form 1023, Application for Recognition of Exemption Under 501 (c)(3) of the Internal Revenue Code, contains a sample conflict of interest policy.
5. Financial Oversight
Nonprofits should provide the governing body with reports of the organization’s financial activities so that they may carry out their duty of ensuring financial resources are used to further the exempt purpose. The Form 990 should be reviewed by the full board and/or a designated committee prior to filing with federal and state authorities. In addition, the independent accountant’s report and management letter should be reviewed by the board and/or a designated committee so that recommendations can be implemented as appropriate.
6. Document Retention
Organizations should have a written policy for document retention and destruction. In addition, organizations should maintain written minutes of governing body meetings as well as board-authorized committees. These minutes should document when the meeting occurred, who attended the meeting, when a quorum was not available, and decisions made.
The impact of governance is pervasive. It affects an organization’s success in furthering its mission, its exposure to scrutiny by state and federal regulators, and the public perception of its worthiness. These guidelines provide a helpful tool for nonprofit organizations to evaluate their own governance policies and their effectiveness.
