Non-Profit Boards Barely Squeaking by on Their Purpose and Function

Ultimately It's the Communities Who Suffer

Not-for-profits are considered important by much of the population and many Canadians believe they improve quality of life.

Communities rely on the hard work produced by not-for-profit organizations. Unfortunately, not-for-profit organizations are susceptible to misunderstanding of policies just like any other organization. And when policies are not administered correctly, fraud can happen.

According to the 2014 Report to the Nations on Occupational Fraud & Abuse published by the ACFE, not-for-profits reported much lower median losses than their for-profit counterparts. Well this makes sense as for-profits are focused on revenue vs. community service.

However, that doesn't mean that not-for-profits aren't easily harmed by fraud. Any form of misconduct can take away the focus of much needed programs to communities, as well as eliminating essential funding from governments and communities they serve. That could mean the downfall of that organization. illustration chalkboard with white text not for profit

A recent survey of 924 non-profit directors revealed that many boards are ineffective. This survey, conducted by accounting professor David F. Larcker, showed a significant number of people 'are unsure of their organization’s mission and strategy, dissatisfied with their ability to evaluate their organization’s performance, and uncertain whether their fellow board members have the experience to do their jobs well.'

It doesn't matter the nature of an organization - manufacturing auto parts or providing community services - the management of the organization shouldn't, in theory, change. Policies and procedures need to be developed, distributed company-wide, and understood.

From the survey:

  • 42% don't have an audit committee, and many rely on monthly bank statements to monitor financial performance

This is a frightening statistic and any small business should be quivering. When it comes to financial performance and monitoring bank statements, at the very least it's recommended that the person cutting and signing the checks, is not the same person reconciling the accounts. If a fraudster is lurking in the shadows waiting for an opportunity to mess with the banking, and they know that bank statements get delivered to the board unopened and not tampered with, chances are they will cease the fraud because the opportunity has been taken away.

  • 27% of board members don't think their colleagues have a strong understanding of the mission and strategy

A not-for-profit's mission and strategy is just a subset of a compliance policy. It may not be as robust as a large organization's is, but it's still a policy. Not understanding it will hinder the ability to create an internal culture of integrity and accountability. Not-for-profits and charities rely on staff and volunteers to operate, so it's essential that they all know and understand what standards and procedures they should be adhering to - this includes the boards as representatives of the entity.

The survey made a recommendation that explicit goals and strategies need to be established in order to achieve any given non-profit's mission. Every one of those goals and strategies need to play by rules that have been set out in policies and codes. But none of these will result in success without the help of the people executing on them.

Not for Profit Governance

There's no one-size-fits-all compliance program or policy booklet. Depending on a variety of factors such as size of non-profit, services provided, location and risk profile, an entity should determine what is appropriate for its own needs. And if there's any faltering of those rules, or disregard of ethics, there needs to be a mechanism in place for speaking-up about that, otherwise the consequences could be dire.

The ACFE's Report to the Nations spells it out clearly. The frequency of frauds in not-for-profits has grown year over year - 9.6% in 2010, 10.4% in 2012, and 10.8% in 2014.

The median loss has increased too - $90,000 in 2010, $100,000 in 2012, and $108,000 in 2014.

It's clear, from the survey mentioned above, and the ACFE's Report, that if not-for-profits don't do something now, they may find themselves lacking funding and grants, resulting in ceasing operations. Anonymous insider tips are the best way to learn of any kind of wrongdoing - the need for transparency makes it so. Download an eBook to learn more about how anonymous tips can help build and strengthen your not-for-profit.

eBook: 7 Reasons to Implement a Whistleblower Hotline