Charities and Opinion and Governance and IRS Form 990 and Viewpoint and Philanthropy

Not-for-profit governance needs to be taken seriously

February 9, 2009

In recent months, not-for-profit entities throughout central Indiana have been in the news for all the wrong reasons. Misappropriations, thefts and other fraudulent activities have taken center stage, while these same organizations search for additional funding in a poor economic environment.

The culprit seems to be a lack of understanding of the art of governance and accountability. Many boards of directors have not taken to heart their responsibilities, opting instead for the easier route of trusting management and operating personnel.

Traditionally, members of not-for-profit boards comprise the three W's—work, wisdom and wealth. Most members have a deep passion for the mission of the organization and willingly volunteer their time, energy and money to the cause. While this passion is necessary and desirable, it can't come without the notion that the primary role of the governing body is to govern and establish guidelines for accountability to the mission and the organization.

Not-for-profits, similar to publicly traded companies, hold the public trust. Frauds like those perpetrated by the folks at Enron and followed most recently by the incredible antics of Bernard Madoff, demonstrate that not-for-profits are not alone in this arena.

Congress passed the Sarbanes-Oxley Act of 2002 to attempt to get more accountability by governing bodies of publicly traded companies and, in 2008, the Internal Revenue Service revamped its annual Form 990 in an attempt to tighten up governance and accountability by not-for-profits. As part of its new Form 990 project, the IRS issued a document titled, "Governance and Related Topics-501(c) (3) Organizations" that reinforces the seriousness of governance in not-for-profits. The blueprint is there for not-for-profits, but some governing bodies choose to ignore common sense and allow management to operate with little or no governance or accountability.

This is a serious issue for all those organizations and individuals who support local charities. Donors have the right to assume the governing bodies of these organizations are doing just that—governing. The credibility of all not-for-profits is jeopardized when otherwise reputable organizations break the public trust by taking the easy way out and trusting those who manage the operations to do the right thing. There is a science to governing, but it is also an art form. It takes leaders who understand their responsibility to the public and are willing to make governance their No. 1 priority.

Governing bodies can govern without spending an inordinate amount of time and resources by simply using common sense, assessing the risks of fraud, establishing a strong and active finance committee, and forming an independent audit committee to assist in overseeing the financial risks of the organization. Policies regarding whistleblowers, conflicts of interest and executive compensation are simple to establish and monitor, and bear little or no cost to the organization.

Indianapolis is headquarters to a number of influential and highly reputable not-for-profits and has gained an envious reputation as a great place to locate one. It would be a shame if all not-for-profits get painted with the same brush as the few whose leaders ignore the most basic principles of governance.

It is time for members of not-for-profit governing bodies to take a good look in the mirror and recognize that being a board member requires more than just passion for the organization's mission. It also requires energy and unwavering dedication to leadership.
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Alerding is managing partner of Alerding & Co. LLC, an Indianapolis accounting firm. 

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