Financial Fiduciary Responsibility of Nonprofit Boards

For Nonprofit Boards, Numbers Are a Necessity  

As a board member for a nonprofit, you’re expected to attend board meetings, oversee fundraising and management, prepare reports, and help the organization determine its strategic direction. You’re also expected—and, indeed, compelled by law—to oversee the organization’s finances.

Every state has unique laws governing what board members must do but, in general, you have a fiduciary responsibility that breaks down into three general duties:

  • Duty of Care:  Board members are responsible for having the same duty of care for the organization that an ordinary, prudent person would have.  That means you need to show up, participate, stay informed about all aspects of the organization, and take action to help the organization meet its goals.
  • Duty of Loyalty:  Board members must be loyal to the organization, and not use it for personal or professional gain.  Members have to disclose any conflict of interest.
  • Duty of Obedience:  Board members must be aware of state and federal laws and regulations that affect the organization, as well as bylaws and board manuals. 

So where is the obligation to oversee finances?  It is part of the duty of care, which requires you to stay informed about all aspects of the organization.  That most certainly includes reading and understanding financial reports, tracking spending, and participating in strategic planning based on what you find in the financial reports.

The Numbers Board Members Need

It is not enough for board members to look at the previous year’s financials once a year as part of the budget planning process.  That’s far too little, too late.  Instead, board members need to begin by reviewing IRS Form 990, which provides broad information about the organization’s mission, programs, revenue sources, and more. 

Board members then need quarterly or monthly updates on the organization’s financial information, typically provided in the form of the Statement of Financial Position (Balance Sheet) and Statement of Activities (Income Statement).  It’s also helpful to review the cash flow forecast, actuals versus budget, and other key operational figures.

Providing all that information in a clear format to board members should not take many hours of time.  If it does, the organization should look into upgrading to better financial software.  The latest software makes it possible to view project profitability and other up-to-date metrics at a glance, as well as to easily flag trends, key comparisons, missed or hit targets, outliers, and other information that can give board members more helpful insights into the organization’s financial well-being.    

Who Needs to Know?

Even if you don’t serve on the board’s financial or executive committees, as a board member you have a legal fiduciary responsibility to oversee the organization’s finances.  That said, the board treasurer and finance-oriented committees should review financials at least monthly and in more depth than may be necessary for the rest of the board.

It is imperative that at least one board member be experienced and adept at not only reading and comprehending, but also evaluating financial statements with a critical eye.  That’s essential in order for the board as a whole to provide adequate oversight and reduce the risk of errors, malfeasance, or unexpected financial problems.

What if one or more board members identify a problem or concern in the financial statements? The board must then be ready to take action to protect the organization, in whatever form that takes. But to get there—to be ready to make the tough decisions that enable organizations to grow and thrive—it all begins with financial oversight.  That oversight is every board member’s responsibility.

Do You Have the Right Numbers?

At Chazin & Company, nonprofits are our passion and our business.  Contact us to discuss your finance-related challenges, and to see how we can help you get clear, informative financial statements and reports on time and with less hassle.