By Monika Briggs, CPA

This blog is part four of a series designed to guide CPAs through the nuances of nonprofit compliance. Each installment of this foundational series delves into critical aspects of nonprofit management, empowering CPAs with the confidence to navigate this sector effectively. Thus far, we’ve covered nonprofit status and tax exemption in "What Every CPA Needs to Know about Nonprofit Status," the intricacies of IRS and federal compliance in "What Every CPA Needs to Know about Federal Filing Requirements." and most recently state-level obligations in "What Every CPA Needs to Know about State Regulatory Compliance." Now, we turn our focus toward the internal mechanisms that drive nonprofit success: governance and board oversight.

Good governance is more than a regulatory requirement; it is the cornerstone of a thriving nonprofit organization. This blog explores how robust governance structures and strategic board oversight are pivotal to ensuring legal compliance and fulfilling organizational missions. Through discussions on state law requirements and IRS expectations, as well as best practices for board operations, I hope to fortify your understanding of how to maintain transparency, accountability, and integrity within your nonprofit.

Understanding Governance

Governance in nonprofits is structured to ensure responsibilities and rights are balanced among key stakeholders—board members, management, and other parties involved. Nonprofits are typically organized into three key functional areas:

• Programs: This sector is responsible for delivering the organization’s core services and initiatives. It furthers the mission by managing projects and activities that benefit the community or support specific causes.
• Administration / Management: This is a nonprofit’s backbone, handling daily operations to ensure smooth functioning. This area can vary in complexity based on the nonprofit's size and mission, but it typically covers finance, human resources, and general operations and is led by key executives who implement the governing board’s policies and strategies.
• Governing Board: This body – which may be termed the board of directors, trustees, or regents – steers strategic direction. It ensures adherence to the mission, effective resource management, and compliance with legal and ethical standards.

Unlike for-profit entities that operate under the oversight of owners with financial stakes, nonprofits function without owners. Effective governance is crucial to ensuring that activities remain aligned with the mission and resources are used responsibly. The governing board, while sharing responsibilities with executive management, holds ultimate accountability.

Nonprofit governance requirements vary by state. In Pennsylvania, nonprofit governance is dictated by the Nonprofit Corporation Law (Subpart C of Title 15 of the Pennsylvania Consolidated Statutes). The Nonprofit Corporation Law provides a scaffold for nonprofit operations that offers a flexibility to adapt governance structures via an organization’s bylaws. From board composition to meeting protocols, Pennsylvania law offers a framework to enhance organizational efficacy and accountability.

The Board of Directors

In Pennsylvania, each nonprofit must be governed by a board of directors. The number of directors is dictated by the organization’s bylaws, but must be at least three if the bylaws are silent on the matter. Each director serves a one-year term, and the board is required to meet at least annually. These meetings can be virtual, and there is no residency requirement for directors.

The Nonprofit Corporation Law further details the processes for the selection and removal of directors, setting quorum requirements, defining voting rights, and the formation of committees, among other governance aspects. Nonprofits can customize their governance practices through their bylaws to meet specific operational and governance needs.

Duties of Directors – Nonprofit board members, much like their counterparts in for-profit corporations, bear certain fiduciary responsibilities. These include:

• Duty of Care: Directors must perform their roles with the care, diligence, and prudence that a reasonably prudent person would use under similar circumstances. This includes active participation in planning and decision-making, as well as ensuring the nonprofit has adequate resources to fulfill its mission.
• Duty of Loyalty: Directors must prioritize the nonprofit’s interests over personal gain, avoid conflicts of interest, and ensure that any transactions involving the nonprofit are conducted transparently and are in the organization’s best interest.
• Duty of Obedience: Directors must ensure the organization adheres to its mission and complies with all applicable laws, thereby maintaining the public’s trust.

Legal Protections and Responsibilities – Pennsylvania directors are expected to act in good faith and adhere to a standard of care that a prudent person would consider under similar circumstances. They are protected by the business judgment rule, which shields directors from liability for decisions made in good faith that do not involve self-dealing, provided these decisions are informed and believed to be in the best interests of the nonprofit. This rule encourages directors to make thoughtful decisions without the fear of unreasonable legal consequences.

Board Meetings and Minutes – Board meetings should be held regularly, as stipulated in the bylaws, with at least one annual meeting as mandated by Pennsylvania law. Effective board meetings focus on substantive issues that affect the organization's future. Discussions during these meetings should encourage active participation from all board members, fostering a collaborative environment where strategic decisions are made after thorough consideration.

Minutes of the meetings document the discussions and decisions, serving as a legal record of the board’s actions and deliberations. It is essential that minutes are accurately taken and securely stored. They should include the date, time, and location of the meeting, a list of attendees, whether a quorum was present, a summary of the discussions, decisions made, and actions agreed upon, including voting outcomes. Detailed minutes ensure transparency and accountability, provide a reference for future decision-making, and, if necessary, legal protection for the board and organization.

Committees – Often, committees are created to streamline operations and increase efficiency. Standing committees are permanent in nature, have ongoing responsibilities, and operate year-round. Common examples include the executive, finance, fundraising, governance, and audit committees. Responsibilities are defined by the organization’s bylaws, and they report regularly to the board. Ad hoc committees, also known as task forces or special committees, are established to address specific tasks or projects. Once a task is completed, these committees usually dissolve.

Each committee should operate under a charter that defines its duties and should not supersede the full board's decision-making authority. Some states have requirements that nonprofit organizations must form certain committees, particularly related to financial oversight. For example, in New York, nonprofits required to file an annual financial report with the state attorney general must have an audit committee. Pennsylvania law leaves the decision to establish committees to the discretion of the organization and its bylaws.

Officers

Pennsylvania law mandates that nonprofits designate at least three officers: president, treasurer, and secretary, although the titles may vary. Notably, a single individual may hold multiple offices, except that the president and secretary must be distinct individuals. Additionally, the treasurer can be an entity, not just an individual.

• President / Chairperson: The president, or chairperson, is the leading figure in the nonprofit. Responsibilities vary, but typically include presiding over meetings, setting agendas, and serving as the organization’s public spokesperson. Depending on the nonprofit's structure, the president might also act as chief executive officer overseeing day-to-day management.
• Treasurer: Tasked with financial oversight, the treasurer manages the nonprofit’s finances, ensuring accurate and compliant financial reporting. Responsibilities include overseeing budgets, managing financial records, leading audits, and reporting the financial health to the board.
• Secretary: The secretary manages internal communications and maintains governance records. Duties include scheduling and organizing board meetings, maintaining accurate record-keeping (such as meeting minutes), and managing compliance deadlines.

Principles for Good Governance and Ethical Practice

The Panel on the Nonprofit Sector introduced in 2007 the Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations. These principles underscore the importance of self-regulation in preventing misconduct. They were updated in 2015 to adapt to evolving operational realities and to ensure their relevance in a changing landscape.

These 33 principles are considered foundational to nonprofit best practices in governance and ethics. They are grouped into four critical categories:

• Legal Compliance and Public Disclosure: Organizations should adhere strictly to legal standards and ensure transparency by making critical information public.
• Effective Governance: Boards should diligently oversee operations and take decisive actions to fulfill their organizations’ missions.
• Strong Financial Oversight: Nonprofits need to manage their finances responsibly and regularly review their financial practices to ensure accountability.
• Responsible Fundraising: Maintaining ethical fundraising practices is crucial for preserving trust and respect among donors and the public.

Key Policies

Every nonprofit organization should have key policies in place to ensure good governance, accountability, and compliance with IRS regulations. While the IRS doesn't require these policies for most nonprofits, it does ask in its annual Form 990 filings whether certain policies are adopted, which implies a best practice approach. Here are some essential policies that nonprofits should have:

• Conflict of Interest Policy: Ensures that decisions are made in the best interests of the nonprofit without personal gain interference from board members or staff.
• Whistleblower Policy: Protects individuals who report misconduct from retaliation.
• Document Retention and Destruction Policy: Ensures proper handling, backing up, retention, and destruction of documents.
• Gift Acceptance Policy: Governs the acceptance and refusal of gifts in a way that supports the nonprofit’s mission and financial well-being.

During audits of 501(c)(3) public charities, IRS agents often review governance practices. For example, they look for a clearly articulated mission, comprehensive bylaws, records of board meetings demonstrating frequency, quorum presence, board member independence, financial oversight mechanisms, and methods for determining compensation of key employees. Other recommended policies may include:

• Financial Controls Policy: Establishes guidelines for managing finances, including handling of cash, banking, payroll, and auditing.
• Executive Compensation Policy: Ensures that compensation for executives is reasonable and in accordance with IRS standards.
• Investment Policy: Outlines the strategies and guidelines for handling the organization's investments, aiming to ensure the prudent management of funds in alignment with the organization's goals and risk tolerance.
• Fundraising Policy: Outlines procedures and ethical guidelines for fundraising activities.
• Code of Ethics: Sets forth ethical standards and expectations for behavior, guiding the actions of all employees and board members.

Implementing these policies enhances credibility and trust with donors, stakeholders, and regulatory agencies, underscoring the nonprofit’s dedication to lawful and ethical operations.

Best Practices

Ultimately, good governance provides strategic direction, ensures objectives are achieved, appropriately manages risks, and ensures that the organization’s resources are used responsibly. Some best practices to achieve this are as follows:

• Strategic Board Recruitment: Focus on aligning board composition with the organization’s needs, emphasizing diversity and inclusivity to reflect varied perspectives and skills. This strategic approach should prioritize candidates who bring essential expertise and enhance decision-making and alignment with community values.
• Board Education and Training: Implement a robust onboarding process complemented by ongoing education to keep board members informed about changes in laws, industry practices, and trends. This should include regular workshops and training sessions.
• Evaluation and Self-Assessment: Regular performance evaluations help maintain board effectiveness. Assessing both individual contributions and the board’s overall composition ensures that it evolves to meet the organization’s changing needs.
• Transparency and Communication: Foster an environment of openness through regular, clear communications with staff, stakeholders, and the community. Transparency in decisions and operations builds trust and enhances organizational reputation.
• Succession Planning: Proactively plan for future leadership needs to ensure continuity and stability. Identify and develop potential leaders from within the board to prepare for smooth transitions.

These practices help build a competent and committed board that can effectively guide the nonprofit toward achieving its mission.

Governance Resources

For nonprofits seeking guidance on governance and policies, several organizations provide free or affordable resources:

• The Independent Sector coalition offers the Principles for Good Governance and Ethical Practice and related tools as well as guidelines to help organizations promote ethical practices and ensure effective governance.
• The National Council of Nonprofits provides resources that include policy templates, governance guides, and best-practice checklists.
• BoardSource specializes in nonprofit board leadership and offers training materials, governance tools, and best-practice guides on topics such as strategic planning and board engagement.
• The Council on Foundations offers guidance on governance and legal compliance, including sample policies and educational materials to help operate ethically and effectively.
• GuideStar is known for its nonprofit reports and data, but it also offers resources that help manage compliance, understand donor expectations, and establish transparency in operations.
• Charity Navigator, while primarily known for its charity evaluations, also offers tips and resources to help nonprofits strengthen their governance practices and enhance their effectiveness.

Conclusion

This blog explored essential governance structures and practices that help nonprofits effectively fulfill their missions while maintaining transparency and accountability. Through strategic board recruitment, ongoing education, diligent self-assessment, and robust operational policies, nonprofits can ensure that they not only comply with legal standards but also earn public trust. Embracing best practices in governance is crucial for any nonprofit aiming to achieve long-term success and make a significant impact in their community.

In the next installment of this series, I will delve into the intricacies of financial reporting standards specific to nonprofits, covering key aspects of GAAP for nonprofit organizations and introducing the principles of fund accounting. This segment will also discuss how nonprofits manage and report on donor-imposed restrictions, ensuring financial transparency and adherence to donor intentions.

The Essential Nonprofit Compliance Series

May 6 | What Every CPA Needs to Know about Nonprofit Status
June 3 | What Every CPA Needs to Know about Federal Filing Requirements
July 15 | What Every CPA Needs to Know about State Regulatory Compliance

Monika Briggs, CPA, has a particular passion for nonprofit finance and compliance, actively enhancing her expertise while helping organizations navigate complex regulatory environments. She can be reached at monika.briggs@gmail.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}