Last week’s blog post described some professions to keep in mind when recruiting finance-savvy Board members. This week, we talk about the financial duties of nonprofit Boards to fulfill the stewardship and oversight role known as “Fiduciary Responsibility.” Fiduciary responsibilities are legally defined. Failure to act as a responsible fiduciary has serious consequences.
At minimum, nonprofit Boards should focus on these four fiduciary duties to oversee the organization’s finances, and to avoid complications down the road.
- Establish Financial Policies
Documented policies are essential for establishing a common understanding and framework for overseeing the organization’s financial resources. Board-level financial policies define approval authority levels, investment objectives, risk tolerances, and risk mitigation activities to protect and preserve assets.
- Monitor Financial Performance
Board members must receive periodic, complete financial statements to oversee financial performance in relation to the budget, financial ratios, and other objectives. Financial oversight responsibilities can be performed by a Finance Committee but results must be reported to the full Board.
- Ensure Audit or Independent Review is Conducted
The Board must be familiar with financial statement audit and IRS information reporting requirements. If applicable, based on income and asset levels, the Board is responsible for hiring the auditor and receiving the audit results. Nonprofits with income and assets below the audit thresholds should consider an independent financial review.
- Take Corrective Action on Audit/Review Results
The results of any audit or independent financial review should be received by the Board or Finance Committee. Reported issues or risks should be acted upon. The action plan and progress on taking corrective action should be documented and reported on to the full Board.
Nonprofit Boards that address these four fiduciary duties are more likely to make appropriate financial decisions. Fulfilling these duties meets donor expectations to protect and preserve the organization’s assets and to ensure that regulatory and legal requirements are addressed.