written by Joe Page
It can be an honor to be asked to serve on the board of a not-for-profit entity but doing so comes with a great deal of responsibility. A not-for-profit entity’s board of directors is responsible for establishing the organization’s policies, procedures and overall organization direction. It is also the board of directors that must ultimately answer to the public and the organizations donors.
Many organizations will appoint a CPA to their board of directors and rely upon that person for the accounting and internal control issues. But, it is important that all members of a not-for-profit’s board of directors should have at least a basic understanding of not-for-profit accounting and internal controls. Not-for-profit entities have unique accounting requirements that if not understood can result potential cash flow issues for some entities.
Not-for-profit entities are required to account for its income based on whether or not a donor has placed restrictions on the donation. If a donor indicates a specific purpose for their donation, the donation must be accounted for as either a temporarily restricted or permanently restricted asset depending on the nature of the donation.
If a director did not understand these basic accounting rules and the nature of their entities donor restricted assets, the director could believe that the entity is in good financial position when in reality it is not. For instance, if an entity has received significant contributions for a new building, the entity could show an impressive bottom line but not have adequate cash available for the basic operations of the entity.
It is also important for directors to have a basic understanding of internal controls. Many not-for-profits attempt to keep their administrative expenses at a minimum so that more of their resources can be directed to the entity’s programs. Doing so, however, often leads to a significant lack of internal controls. It is important for directors to understand their entity’s internal control structure, policies and procedures in order to determine to what extent board should be involved in the day-to-day operations of the entity.
While it is important for most entities to have a variety of talents on its board of directors, it is also important that they all understand basic accounting and internal control. One way to achieve this basic knowledge is to ask a CPA with expertise working with not-for-profits to provide a basic training session for the board of directors.