This post in one in a series written by leaders who are presenting sessions at the 2014 BoardSource Leadership Forum, taking place in Washington, DC, on October 9 & 10. We hope you will be joining us.
We’ve all seen the headlines. From mismanagement to insufficient oversight to criminal activity, nonprofit corporations are not immune from the very same compliance issues that affect for-profits. In some ways, nonprofits may be even more vulnerable to conditions that lead to noncompliance. Rightfully, the mission takes precedence, with governance sometimes taking a backseat. Therefore, the nonprofit board must ensure governance works in concert with, rather than as an impediment to, the organization’s mission-driven activities.
Culture of Compliance
The board can do so by creating a culture of compliance that permeates every level of the organization. From board members to other volunteers, the organization’s stakeholders should understand and embrace compliance as an effective way to ensure the organization’s long-term success.
We often hear from clients who have ignored legal compliance and need our help because they have been audited or investigated or because someone new has joined the organization and brought a new perspective to compliance review. The reasons for noncompliance are many and range from simply not knowing the legal requirements to willful misconduct by someone within the organization. The majority of cases stem from lack of good board oversight with the appropriate processes in place to identify and remedy noncompliant activities. An organization defending itself in an investigation has less time to focus on its mission, so the best strategy is to avoid the investigation altogether.
The Board’s Role
Compliance begins with the board, including selection and onboarding of new members, regular board meetings, and regular communication with the executive director/CEO, CFO, and other key officers. Board member and officer training is critical to ensure familiarity with the state and federal laws governing nonprofit and tax-exempt organizations and practical ways to maintain compliance.
Excellent board governance necessarily includes well-crafted policies and procedures to serve as a guide for both the board itself and the organization as a whole. We often encounter organizations with few, or even no, written governance or financial policies in place. Or, an organization may have excellent policies hidden away and collecting dust. While staff typically carry out the day-to-day activities of the organization, the board can create the framework for ensuring activities are carried out with both the mission and compliance in mind.
How well can your organization handle distraction? Because everything will not run smoothly 100 percent of the time, organizations must be prepared for when things go wrong. With the appropriate framework of compliance implemented by the board and carried out by the board, staff, and volunteers, compliance becomes such a permanent part of the organization’s culture that even a distracting event will not affect compliance efforts.
The Cost of Noncompliance
Some organizations and their leaders believe they cannot afford to hire a professional to assist in compliance efforts. In reality, however, they cannot afford not to. The consequences of noncompliance can be dire and may include internal financial losses caused by fraud, theft, or mismanagement, excise taxes, and penalties levied against individual board members, and in the most egregious cases, even loss of tax exempt status and criminal penalties. This, coupled with the potential negative media attention and loss of support, will be much more costly to an organization than including compliance in an organization’s goals and budget.
Instilling compliance values into an organization beginning with the selection of board members and continuing through every level of the organization will ensure the organization’s mission is never overshadowed by noncompliance and its resulting negative consequences.
Brooke Asiatico is the founding member of Asiatico & Associates, PLLC, a law firm providing trusted legal counsel to nonprofits of all sizes throughout the country. She has advised numerous clients through legal compliance matters, including guiding organizations through IRS audits and state agency investigations.
Katari Buck is a member of Asiatico & Associates, PLLC. She provides legal counsel to nonprofits, focusing on state and federal legal compliance, employment law, and general nonprofit corporate law.