By Priscilla Guajardo Cortez
Over the last decade, nonprofit corporations have faced increasing government and public scrutiny, due in large part to scandals like Enron and the United Way. With the passage of the Sarbanes-Oxley Act and Pension Protection Act in 2002 and 2006, and the release of a redesigned IRS Form 990 in 2007, nonprofit organizations are now expected to follow stricter transparency, governance, and accountability requirements.
How can nonprofits stay compliant?
Given increased regulation and responsibility of the nonprofit sector, how does your organization stay in compliance and avoid legal troubles? Most nonprofits answer by conducting annual financial audits. While a financial audit is important, alone it will not reveal any deficiencies in your organization’s compliance with state and federal laws related to governance and operations. For this reason, nonprofits should strongly consider investing the time and resources to conduct a legal audit in addition to their financial audit.
You are probably saying to yourself: “This sounds like a good idea, but how much will it cost?”
Legal audits, in their simplest form, involve a review of your organization’s documents and policies like articles of incorporation, bylaws, administrative procedures, and employee handbooks. By simply investing the time to review these documents, alone or with your board, you can discover any outdated documents, policies and practices that may be legally questionable or cause potential problems, and address them before they escalate and cost you thousands of dollars in legal fees.
While we encourage you to consult an attorney on legal matters such as this, below are some guidelines that could help you stay in compliance and/or prepare you for working efficiently with legal counsel:
Organizational Policies
- Establish and implement policies and procedures that enable your employees and volunteers to come forward with credible information on illegal activities of your organization. This “whistleblower” policy must specify that these individuals will not be punished for coming forward.
- Establish and implement policies and procedures to protect and preserve your organization’s documents and business records.
- Publish information about your operations, including board members, finances, programs, and activities in a manner that is widely available to the public (Form 1023 and Form 990).
Board Governance
- Do not make loans to your directors and officers.
- Establish and implement a conflict of interest policy either as part of your bylaws or as a stand-alone policy.
- When appropriate, establish a separate audit committee from your finance committee and ensure that at least one member is a financial expert and that no staff serve on this committee.
- Consider rotating at least the lead and reviewing partners of your audit firm every five years to ensure a fresh perspective and thorough review of financial practices.
Nonprofits stand to benefit greatly by conducting periodic legal audits, every 3 – 4 years, instead of waiting until a conflict arises and it is too late!