Phantom Boards and Bobble Heads

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Last week, we attended a meeting of the National Association of State Charity Officials (NASCO) in Washington, DC. In keeping with the season (Hallowe’en’s coming up), it was nice to see that behind their “scary masks,” government officials are just as concerned about nonprofits being victimized by fraud as as they are about protecting donors from fraudulent fundraising. We also heard directly from a panel of regulators about what conduct can spook state charity regulators into conducting investigations of charitable nonprofits:

No one’s home – When charities don’t respond to letters requesting them to submit required filings, the silence raises regulators’ suspicion. Bottom line: Answer your mail and don’t neglect to file required registrations with the state! (Brush up on annual state filing requirements.)

Phantom boards - Charity regulators told us that they worry a great deal when a board of directors isn’t acting as a true board – such as when a list of board members is published but those on the list have no idea they are on the board. A “phantom board” is the expression one of the regulators used to describe this phenomenon. A phantom board can exist anytime all decision-making and control of the organization rest with one person instead of with an active, engaged board. Bottom line: Absentee board members create a heightened risk of financial shenanigans. Better an engaged board than ghosts! And if your board is less engaged that it could be, it might be time to brush up on recommended internal controls, as well as roles and responsibilities.

Bobblehead board members – You’ve been there: board members who nod “yes” to everything and avoid both conflicts and asking questions. Where is that nonprofit’s culture of accountability and transparency? Bottom line: “I’m just a volunteer” is not an excuse for avoiding respectful inquiry.

Ghost fundraising – Some charitable nonprofits don’t find out about a fundraiser that was held “in their name” (surprise!) until a concerned donor calls up to ask for a record of his/her donation. Donors, nonprofits, and state charity regulators each have an interest in stopping fraudulent fundraising. Bottom line: Take proactive steps to educate donors about the questions they should ask to ensure that their contribution is going to a charitable nonprofit that is recognized as tax-exempt and registered with the state for charitable solicitation purposes in states with that requirement.

Vanishing bank records – With online banking, a nonprofit’s statements are now often stored in the cloud and access to them may expire after a year or so: just when the regulators come knocking to ask for copies. Bottom line: For the nonprofit’s own protection, someone should always have ready access to the nonprofit’s banking records, even those that go back a few years. While regulators may hope nonprofits will always print out and maintain hard copies, there’s probably a solution for your nonprofit that won’t require so much paper. (And don’t forget to follow document retention policies!)

Take off the mask – What makes regulators really suspicious of nonprofits?  When nonprofits report ZERO fundraising expenses and/or report more expenses for paying a professional fundraiser than the nonprofit received in contributions. Bottom line: “Costs, unmask thyself!” #OwnYourOwnCosts. Only when nonprofits are transparent about what it really costs to fundraise and to deliver programs will their own financial practices be sustainable. Help donors, grantmakers, and governments appreciate that it costs something to deliver charitable missions.

Trick or treat – State charity regulators also reported that they become concerned when they discover that board members don’t know what their own organizations’ 990s are reporting. (Hint: It’s that phantom board concern.) Bottom line: While the IRS Form 990 seems like an onerous beast, it’s actually one of your nonprofit’s best friends and your board should be reviewing the Form 990 before it’s filed with the IRS.

Find out what practices are encouraged for your nonprofit to be financially prudent, ethically sound, and wisely governed. Look to your State Association of nonprofits for principles and practices of good governance, Standards for Excellence ™ and similar guidance.


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