Board Member Fiduciary Duties

As CPAs we are often asked to join a board of directors, and more times than not, as the treasurer. Have you been asked to join a board of directors? Have you wondered what responsibilities board members have? Being part of a board of directors can bring a new level of understanding to all the different parts that are needed to plan, strategize, and execute to make an organization operate and be successful.

Who Is Responsible for What?

When taking part on a nonprofit board of directors, members need to be financially accountable and govern the organization’s resources in an honest and cost-effective manner. In my experience, it is often assumed the financial oversight lies with the treasurer of the board — since they likely have the financial background. However, this responsibility lies with each and every board member.

Leading practices for fiduciary responsibilities of board members include:

• Safeguarding assets and making sure they are used appropriately
• Developing program revenue and expenses objectives that align with the mission of the organization.
• Approving an annual budget based on the financial goals of the organization prior to the start of the fiscal year. Key practice is to develop spending based on income.
• Reviewing financial statements on a regular basis, including comparison of budget to actual results. 
• Working with management to establish sound internal controls and processes.
• Making sure financial policies are developed to guide the operations of the organization.
• Consider creating an operating reserve for organizational reinvestment and working capital.
• Oversight of annual audit results and required action plans.
• Monitoring compliance with financial laws and regulations.
• Approving any non-routine contractual obligations.

Beyond The Mission

How in-depth should a board member be about knowing the organization beyond its mission? Clearly understanding the operations of the mission and strategy is necessary to serve constituents’ needs. Fiduciary duties also include consistent self-evaluation of the mission and programs.

Board members provide direction for developing financial resources that support program activities. It is equally important that the board sets the direction for the strategy then leaves management and executive directors to set policy-oriented controls. The pandemic tested the responsibilities of board members, as the immediate strategy changed drastically compared to pre-pandemic times. There was a necessity to be flexible with the strategy and continue to serve the constituents’ needs from a broader mission perspective.

Internal controls and policies are a significant component to fostering fiscal responsibility. As a board member, you may or may not know all the details of each control, but it is your duty to verify the organization has strong controls in place to safeguard its assets. Segregation of duties should remain at the forefront of your mind when reviewing and approving policies. No one individual should have the capability to have custody of the assets, approval of transaction, and recording of transaction.

Through my experience with nonprofits as a board member and as an auditor, if the organization has a well-documented and laid out financial manual it provides better awareness of internal control practices and is easier to understand and have the overall fiduciary knowledge. Key areas where it is important to have internal controls would be around key classes of transactions such as receipts, cash disbursements, and payroll.

Knowledge of Financial Health

Operational and program health is important; however, board members should understand the organization’s financial health as well. Often, financial health goes hand in hand with the strategy of the organization. In evaluating whether an organization has adequate resources to accomplish its mission, a board member needs to understand the content and significance of their financial statements and audit. Assess the annual audit implications and approve action plans to strengthen performance in order to make sure the organization is in compliance with all relevant financial laws and regulations. Subcommittees of the board should meet routinely for honest and cost-effective discussions on the organization’s financial resources. For budgeting, where possible, establishing an operating reserve to finance working capital and organizational reinvestment can allow the board to focus on current programs versus future-oriented topics.

When given the opportunity to join a board, understand the fiduciary duties and time commitment. We serve on boards of nonprofit organizations where those duties and time seem to fluctuate based on current events. As a CPA, the easy part is understanding the financial information and commenting on audit-identified suggestions. However, in a year like 2020 where there were so many uncertainties, the role I played as a board member was broadened beyond the financials. There were more frequent meetings where the management team surveyed board members on their strengths and expertise. Management was then able to leverage the expertise with the current needs for its constituents. The expanded dialogue strengthened the bond between the board members and management for the overall success of the organization.

This blog was co-authored by Lili Huang, Nonprofit Principal at CLA.

For more nonprofit events, join CLA’s webinar on Strengthening Nonprofit Accountability Through Audit-Ready Financials on October 20, 2021. Register at: https://www.claconnect.com/events/2021/si-strengthening-np-accountability-through-audit-ready-financials-10-20