The public expects a charity to abide by ethical standards that promote the public good. The organization’s governing body bears the ultimate responsibility for setting ethical standards and ensuring they permeate the organization and inform its practices. We encourage a charity’s Board to consider adopting and regularly evaluating a code of ethics that describes the behavior it wants to encourage and behavior it wants to discourage. A code of ethics will serve to communicate and further a strong culture of legal compliance and ethical integrity to all persons associated with the organization.
Although we believe that in many respects a not-for-profit organization is essentially a business just like any other business, the community has come to expect more integrity and accountability from the not-for-profit organization than from other businesses in the community. An ethical lapse or an illegal activity will cause the not-for-profit organization more in lost respect and admiration than a for-profit business. All businesses serve the communities in which they operate, but the community holds the not-for-profit organization to a higher standard. It is up to the Board to ensure that their organization lives up to that standard.

Because of fraud, embezzlement or other breaches of public trust, our not-for-profit organizations today are subject to increased scrutiny. There are more not-for-profit watchdog groups looking over the shoulder of not-for-profit organizations now than ever before. The Board is ultimately responsible for ensuring adherence to legal standards and ethical norms. You want to do this not out of fear of being caught, but because your mission is so important, you don’t want to waste any resources or have any issue get in the way of your very important work.

This does not mean that the average Board member must become an ethicist, a legal expert or a fraud investigator, or even an internal control specialist. Ensuring legal and ethical integrity and maintaining accountability starts with the attitude of the Board and a clear policy that the organization intends to go beyond what is minimally required to maintain accountability. The best way to discharge this responsibility is for the Board to continually ask reasonable questions and expect good answers.

For example, if your organization receives numerous small donations or has a high volume of other types of receipts, a reasonable question is “how do we know that every receipt makes it into our bank and is not lost or misappropriated along the way?” A Board member does not need any special training or skill to ask such a question and also can likely evaluate the quality of the response.

The Board should not limit its questions to internal controls. One could ask general questions relative to any area. For example, “what are we doing to assure that our fundraising tactics are within ethical fundraising norms?” Ideally, the response to such a question will elicit the acknowledgment that the development people are aware of ethical fundraising norms and what actions they have taken to assure that this organization operates in compliance with those norms. Perhaps at a future Board meeting, a presentation could be made to the Board on this topic.

The IRS form 990 now contains a number of questions relative to policy and governance. The IRS requires that the annual 990 form be reviewed by the Board. There are yes/no questions on subjects such as conflict of interest policies, document destruction policies, whistleblower policies, etc. In addition to seeing if these questions are answered in the affirmative, the Board should ask for the details of such policies. What is the conflict of interest policy? How is it administered? To whom does it apply? What potential or actual conflicts have been reported under this policy in the past year? How were they handled?

We also encourage the board of directors to adopt an effective policy for handling employee complaints and to establish procedures for employees to report in confidence any suspected financial impropriety or misuse of the charity’s resources. Such policies are sometimes referred to as whistleblower policies. The Internal Revenue Service will review an organization to determine whether insiders or others associated with the organization have materially diverted organizational assets. Organizations that file Form 990 will find that the form asks whether the organization became aware during the year of a material diversion of its assets, and whether an organization has a written whistleblower policy.

In essence, the Board should be “involved” in every aspect of the organization’s activities and should implement policies and procedures that demonstrate its commitment to high ethical standards. In addition, involvement generally means asking good questions and demanding good answers. Not asking questions and assuming that your organization with the lofty mission is perfect is a problem waiting to happen. Each time you read or hear something in the news, you might ask “what are we doing to try to prevent that from happening here?” Organizations are run by humans and it is the Board’s job to elevate the organization above human weaknesses and normal human nature.

Read more on not-for-profit boards:
Responsibility #4: Accessibility of Resources
Responsibility #3: Providing Proper Financial Oversight
Responsibility #2: Hiring a CEO
Responsibility #1: Mission & Purpose

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.