Five Practices to Improve Your Organization's Governance (article)

Five Practices to Improve Your Organization's Governance (article)

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A strong governance plan helps not-for-profits increase internal efficiency, minimize risk and stay compliant with tax regulations. The Internal Revenue Service (IRS) believes that a well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance. How to design and implement this strong governance plan is up to the organization to determine.

Not-for-profits must include a written framework for their governance plan as part of their initial tax-exempt application. Tax law does not require any particular management structure, operational policies or administrative practices but expects policies to be in place that help ensure compliance with financial regulations. States may have additional requirements for a not-for-profit's organizational structure. Much of the responsibility falls to the not-for-profit, however, to figure out the best methods to use for its organization.

The IRS does not review all of a not-for-profit's organizational documents on an annual basis. The Form 990, though, contains several governance-related queries such as composition and independence of the governing board; general governance policies and procedures; and how the not-for-profit makes governance and financial information available to the public.

Organizations should periodically update their organizational documents to reflect the changing needs of their organization. Below, we have included five areas your organization can focus on to strengthen and improve its governance strategy. Please note that any changes your organization decides to make to its governance policies should be reflected on your Form 990.

Recordkeeping

Recordkeeping provides information not only to the IRS but also to your not-for-profit's management team. An efficient, accurate recordkeeping system provides a detailed look at how your organization uses its funds. You can learn how much activities cost, how long an activity took to complete, who was in charge of that activity and which programs proved to be successful. These thorough records will help you verify items on federal and state returns. They can also minimize the risk of fraud within your organization and often pinpoint where financial leakage or inaccuracies are occurring.

Due Diligence

The IRS recommends organizations practice due diligence, which in governance terms means in good faith, with the organization's best interest in mind and with the care that "an ordinary, prudent person in like circumstances would exercise."

To ensure due diligence is being carried out, management should review the not-for-profit's strategic and operating plans, senior leadership evaluation system and compensation practices, and the organization's financial reporting and audit process.

Conflicts of Interest

Your organization's conflicts of interest policy should include written procedures that spell out whether a relationship, financial interest or business affiliation is or could be a conflict of interest.

Related party transactions provide a good starting point for potential sources of conflicts of interest. Related parties must be reported on the 990, and any such transaction must represent an "arms length transaction" which would represent transactions that are similar to the pricing and trades that would be made between unrelated entities. Private inurement, such as excessive payments to your organization's insiders or transfers of property to insiders for less than fair market value, can cost your organization its tax-exempt status. It is critical your governance plan have rules and procedures in place to minimize your organization's private inurement risk.

Similarly, a good conflicts of interest policy limits "private benefits" to individuals not employed by the organization. Private benefits can also jeopardize a tax-exempt status. Be sure to include in your conflicts of interest policy how your organization responds to an identified conflict of interest.

Best practices suggest that the organization obtain a signed conflict of interest statement from your board members and key management on an annual basis. In addition, organizations should include a statement in the conflict of interest policy that requires related parties to proactively disclose any "potential" conflicts that may occur.

Many states have additional laws such as prohibition of loans to related parties. Careful review of each state requirement is essential.

Code of Ethics

An organization's code of ethics helps establish the culture of the organization. Well-defined codes of ethics set the standard for ethical integrity and legal compliance.

Included in this policy should be procedures for employees to report suspected wrongdoing within the organization. It is critical employees know what protection they have under the company's whistleblower policy so they can help the organization with self-policing.

Compensation

A hot topic in the not-for-profit world, compensation policies deserve a thorough review. Not-for-profit CEO salaries have been making headlines, which means this area will likely be subject to more IRS scrutiny.

The IRS requires not-for-profits use "reasonable" compensation for their employees and executives. Board members who are independent of the not-for-profit should be involved in determining wages. Recordkeeping should also demonstrate how the not-for-profit determined the reasonable wages it provided.

Review, Revise and Implement

The best governance plans are tailored to meet the unique needs of the not-for-profit. They should be updated as your organization evolves to best address your current needs and concerns. For further guidance on the best practices that can improve your organization's internal controls, contact your local CBIZ office.


Copyright © 2014, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. To ensure compliance with requirements imposed by the IRS, we inform you that-unless specifically indicated otherwise-any tax advice in this communication is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

Five Practices to Improve Your Organization's Governance (article)A strong governance plan helps not-for-profits increase internal efficiency, minimize risk and stay compliant with tax regulations....2014-11-03T15:18:00-05:00

A strong governance plan helps not-for-profits increase internal efficiency, minimize risk and stay compliant with tax regulations.