Joyce Dulworth, CPA and tax partner with BKD LLP, along with Michael Earls, CPA, presented this topic during the 2013 Ball State Foundation PAC Seminar.

1. experience direction //
CPAs & ADVISORS
FIDUCIARY RESPONSIBILITY IN NOT-
FOR-PROFIT BOARDS
PHILANTHROPY ADVISORY COUNCIL
Presented by
Joyce Dulworth, Partner, BKD, LLP
Michael Earls, Manager, BKD, LLP
June 27, 2013

2. CHANGING LANDSCAPE FOR NOT-FOR-
PROFITS
Greater scrutiny being placed on not-for-profits—particularly
public charities [501(c)(3) organizations]
Response to high-profile scandals in the not-for-profit world
Continued trickle down effect of Sarbanes-Oxley
What does this mean?
Role of Board and Audit/Finance Committees is crucial for good
governance and evolving
Expectation gap between the general public (including donors,
watchdog groups and regulatory authorities) and the members
of these bodies regarding the scope of their fiduciary duties is
narrowing
2

3. CHANGING LANDSCAPE FOR NOT-FOR-
PROFITS
Where is this greater scrutiny coming from?
Congress (Senate Finance Committee)
IRS (Form 990)
State Attorney Generals
Watchdog groups
Donors
3

4. FINANCIAL OVERSIGHT ROLE OF
BOARDS AND AUDIT COMMITTEES
Important to remember there are no current
mandates other than fiduciary duty to donors,
members, beneficiaries, etc.
Efforts of the Board and Audit Committee are
meant to supplement the assessments of
others
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5. FIDUCIARY DUTY
Whatever their mission or size, all organizations should
establish appropriate policies and procedures so that:
Boards and Officers understand their fiduciary
responsibilities
Purposes of the organization are carried out
Assets are managed properly
Organization operates for the public good
Failure to meet these obligations
is a breach of fiduciary duty
and can result in financial and other liability
for the Board and/or its Officers
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6. FIDUCIARY DUTY
Who is responsible?
Board of Directors, Finance/Audit Committees and
Management share fiduciary responsibility
Board of Directors and Finance/Audit Committees
also share the duties of Care, Loyalty and
Obedience
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7. FIDUCIARY DUTY
Care—requires that you act with the care that a reasonably
prudent person in a similar position would use under similar
circumstances, i.e., must act in an informed manner
Loyalty—requires that you place the interests of the
organization over your own personal interests and refrain from
using your position of trust to further your own personal gain,
i.e., must act in good faith
Obedience—requires that you perform your duties in
accordance with applicable statutes and with the organization’s
bylaws and policies, i.e., must effectively carry out the purposes
of the organization
7

8. FIDUCIARY DUTY
Primary responsibility of the Board of Directors
and Management is to ensure that the
organization is accountable for its programs
and finances to contributors, members and
government regulators
8

9. FIDUCIARY DUTY
Accountability requires that the organization:
Comply with all applicable laws and regulations
Adhere to the organization’s mission
Create and adhere to conflict of interest, ethics, personnel
and accounting policies
The development and maintenance of internal controls
will help to ensure accountability
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10. FIDUCIARY DUTY
Accountability requires that the organization:
Protect the rights of members and donors
Prepare and file its annual financial report with the IRS and
appropriate state regulatory authorities and make the
report available to all members of the Board and any
member of the public who requests it
The development and maintenance of internal controls
will help to ensure accountability
10

11. INTERNAL CONTROLS
WHAT ARE THEY AND HOW DO THEY HELP?
How do they help?
Increase likelihood that . . .
Financial information is reliable so Management and the Board
can depend on accuracy and make sound decisions
Assets and records of organization are not stolen, misused or
accidentally destroyed
Organization’s policies are followed
Laws and regulations are followed
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12. FIDUCIARY DUTY
Board of Directors and Management share
responsibility for setting a tone of trust and
accountability by:
Reviewing or establishing written policies for:
Code of Ethics
Conflicts of interest
Managing investments
Purchasing practices
Expense reporting, etc.
Creating a safe environment to address governance issues
12

13. FIDUCIARY DUTY
What else can be done?
Practice risk management
Establish appropriate internal controls
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14. INTERNAL CONTROLS
WHAT ARE THEY AND HOW DO THEY HELP?
What are they?
Systems of policies and procedures that promote and
protect sound management practices—both general and
financial
Provide the organization with the ability to record, process,
summarize and report financial data consistent with
assertions of management in the financial statements
Every organization is different; therefore, nature and extent
of control environment will vary
As organizations evolve, so should their system of controls
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15. INTERNAL CONTROLS PREVENTING FRAUD
& ABUSE
Establishing adequate internal control procedures is the best
deterrent to internal fraud and embezzlement
Cost/benefit decisions must be made
Risk assessment and tolerance levels of Management must be
different than those of auditors, i.e., what is material to a donor
or a member vs. other users of financial statements?
Perfection not expected—no system of controls can prevent
collusion
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16. INTERNAL CONTROLS
WHAT OTHER STEPS ARE IMPORTANT IN
PREVENTING FRAUD?
Next to controls, most effective strategy is to
create an environment “hostile” to fraud
Define acceptable and unacceptable activities—
provide in writing to staff and volunteers
Provide procedures to report suspected fraud—
provide in writing to staff and volunteers
Fully investigate suspected fraud
Treat offenders in a consistent manner
16

17. FINANCIAL OVERSIGHT ROLE OF THE
BOARD OF DIRECTORS
Board is ultimately responsible for:
Establishing and maintaining effective internal controls
over financial reporting
Setting the proper tone
Creating and maintaining a culture of honesty and high
ethical standards
Establishing appropriate controls to prevent, deter and
detect fraud and illegal acts
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18. IRS CHANGES TO FORM 990
Significant redesign of Form 990
Designed to enhance transparency and
provide IRS and public with a realistic picture
of the organization
Portion of the form requires governance
information
18

19. BOARD CONSIDERATIONS WITH THE
FORM 990
Board should review its existing governance policies
and consider:
Conflict of interest policy
Whistleblower policy
Document destruction and retention policy
Investment policy including risks associated with alternative
investments
Policy requiring safeguarding exempt status with respect to
transactions and arrangements with related organizations and
individuals
Necessity and makeup of an audit or finance committee
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20. BOARD CONSIDERATIONS WITH THE
FORM 990
The federal tax Form 990 is a public document which is a
useful tool to donors, regulators and others.
Other significant changes/questions for the Form 990:
Disclosure of relationships with board members and between
board members (ODTKE)
Any review by a governing body or delegated body?
Disclosure of process for review of executive compensation
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21. OTHER RISK CONSIDERATIONS
Benchmarking
Compare to peer groups
Monitor trends
Red flags
Compensation practices
Rebuttable presumption test
Selecting comparables
Documentation
Independent voting members
Percentage based on IRS definition of independence
Media communication
Preparation?

22. experience direction //
CPAs & ADVISORS
QUESTIONS