by Robert I. Evans and  Avrum D. Lapin

“We think that the foundation should have glass pockets.”
Russell Leffingwell, Chair, Carnegie Corporation, 1952

Effective oversight of financial systems in nonprofit organizations is key to their proper and effective functioning. This philosophy, however fundamental, has not always been universal practice nor have donors always expressed more determined expectations about the transparency of organizations they support.

In today’s marketplace, nonprofits that watch over finances and share financial, programmatic and other information with their constituents build stakeholder confidence and are thus far better suited to fulfill their missions, deliver effective services and adequately address donor concerns. Nonprofit finances not only include fiduciary elements but also address reporting of capital, personnel and programmatic expenditures.

But no organization is immune from the high standards of financial transparency. Within the last few months, two rabbis were accused of mishandling precious donor dollars for organizations they headed, and the headlines in various media and across the internet were, well, ugly.

Therefore, in today’s fast-paced and accessible environment, the landscape is changing and standards are rising. In fact, while we eschew “gotcha” scenarios, we do encourage every one of our client organizations to establish a financial oversight committee – apart from the agency’s treasurer and CFO – for major campaign efforts and ongoing operations, especially to assure donors at all levels of proper procedures and practices!

At the heart of increased transparency and accountability is the widespread belief that, in return for public support, nonprofits have a special responsibility to the public: a responsibility to earn and maintain trust instilled by donors to properly utilize funding to fulfill their stated mission. Today, no nonprofit leader, professional or volunteer, could be considered exempt from scrutiny; and we suggest that nonprofits today must be diligent in setting policies and adhering to best practices to assure donors that they are in force and the guide organizational decision making at all times.

Media reports abound with the financial shenanigans undertaken by some nonprofit staffs and boards. And we know that the Jewish community is not immune from various recent horror stories that validate the importance of nonprofits establishing formal policies to promote transparency. In this context we are often stunned to hear that some people claim that they do not want to receive information even when agencies produce extensive annual reports or other detailed materials.

Here is a review of only a few recent examples of alleged bad practices:

Excessive spending on luxury travel, jewels and clothing appear to be the habits of a New York-based educational and charitable organization in the Orthodox community.

A Birmingham, Alabama, nonprofit that provides computers to needy kids was treated as a “personal piggy bank” by the founding board member who traveled, gambled and lavishly spent charity money for years. During this time, this nonprofit did not even file the requisite IRS nonprofit forms.

Embezzlement of nearly $1 million by an outside accountant was treated as an internal matter by the CEO and other high level staff of a nationally known community organizing operation. Neither the Board nor law enforcement was initially notified as the CEO sought to cover up the misuse of funds. The outside accountant also happened to be the CEO’s brother so the drama continued unabated.

A Chicago-area nonprofit providing affordable housing dedicated nearly $700,000 to the director’s salary, three times as much what other nonprofit housing leaders in the region made.

Clearly, no sector, whether Jewish or not, is immune from scandal. So what should nonprofits do?

1. Damage to the public perception of the organization and the loss of the public trust is often irreversible, rendering an organization incapable of functioning. Nonprofits rely on the trust and good will generated through fulfilling compelling missions that advance the public good to cultivate and sustain support from donors and clients. Contributors are less likely to support an organization with a history of poor financial oversight or worse.
2. Today’s donors demand greater transparency; they want a financially accountable and open organization. The legacy of the rubble of Enron and financial deals crafted in “quiet rooms,” at the outset of the latest economic recession is a societal push for accountability and transparency. We hold our schools accountable and we expect our government to be open in how it operates and more accountable for its actions. Now, donors view their charitable contributions less as a gift and more like a strategic investment. Therefore, they demand more honest information about how their investment is utilized. It will not take much for sophisticated donors to be turned off by an information vacuum or the perception that the business side of the organization is being handled improperly. The more you share, the more your stakeholders will understand, and the more likely they are to support you.
3. Rules governing charitable organizations, namely from the IRS, require honesty and compliance. IRS Form 990 requires annual reporting on a nonprofit’s mission, governance, programs and finances as well as the organizational compliance with relevant state laws. In addition to the Federal reporting, most individual states require annual reporting of finances and governance. Oversight by local government also ensures tighter controls over nonprofit organizations. After a local charity providing low-income housing and facing mounting financial problems received hundreds of thousands of dollars in grant funding, the city of Glendale, California, approved the requirement for two years of financial statements and audit reports for any nonprofit organization competing for social service funding from the city.
4. Transparency is the basic foundation for collaboration. Openness fosters collaboration with staff, donors and volunteers and the efficient use of resources to fulfill the organization’s mission and increase giving.

Transparency is not easy. In the hectic world of nonprofit management, transparency and financial oversight are often relegated to non-urgent status as staffs and boards may view these as “chores” as not advancing the mission. But as the notable examples consistently show, time well spent on creating and implementing financial oversight systems and a culture of openness are significantly beneficial in the long run. To maintain relevance and stability (or growth), nonprofits should act now and consistently to be more open, compliant and diligent. Below are some recommended steps for openness:

• Nonprofit boards should institute formal policies and procedures to ensure the prudent and responsible management of all financial documents (e.g. budgets, audits, expense reports, compensation, petty cash and invoices). Board members and relevant staff should review, approve and track budget and organizational financials on a monthly basis.
• Accurate and complete financial records should be maintained at all times. Nonprofit organizations should undergo annual audits or reviews by an independent and qualified financial expert.
• Clear policies for reimbursement of documented business and travel expenses should be created.
• Board members should question patterns of spending that seem at odds with stated organizational policies and objectives.
• Boards should create or enhance their audit or finance committees and recruit directors or committee members with relevant professional experience.
• Charitable organizations should use the Internet and other electronic media (e.g. blogs, Twitter, Facebook, website, Flickr, YouTube, Linked In, e-newsletter) to disclose information such as an annual reports, names of board members, as well as mission and vision statements.

Clearly, the nonprofit sector has come under increased scrutiny by the government and private contributors. Establishing consistent and transparent financial oversight systems will go a long way in maintaining the public trust and cultivating financial support.

Robert I. Evans, Managing Director, and Avrum D. Lapin, Director, are principals of The EHL Consulting Group, of suburban Philadelphia, and are frequent contributors to eJewishPhilanthropy.com. EHL Consulting works with dozens of nonprofits on fundraising, strategic planning, and non-profit business practices. Become a fan of The EHL Consulting Group on Facebook; TWITTER: @EHLConsultGrp