Understanding Your Fiduciary Responsibility: Protecting Your Nonprofit and Its Mission

Understanding Your Fiduciary Responsibility: Protecting Your Nonprofit and Its Mission

Being a fiduciary is one of the most critical roles a nonprofit leader can undertake.  Unfortunately, it’s not always easy to understand. Whether you’re a board member, executive director, or another nonprofit decision maker, you may have found yourself unsure about what this role entails. You’re not alone; many nonprofit leaders feel the same way.  

Although the responsibilities that accompany this role are serious, they’re not that difficult to understand and you don’t have to navigate them alone.  

Our goal is to clear up any confusion and help you confidently manage your role, ensuring your organization stays aligned with its mission and is set up for long-term success. 

What Is Fiduciary Responsibility?

Fiduciaries have responsibilities that involve acting in the best interests of their organizations. This includes:  

  • Overseeing governance 
  • Adhering to ethical practices  

Think of yourself as a steward of your nonprofit’s future, making decisions today that safeguard its long-term success. 

The Three Primary Duties of a Fiduciary

  1. Duty of Care: As a fiduciary, it’s your job to make smart decisions and be careful with all your nonprofit’s resources, both financial and human. Think of it like managing your own finances, but on a larger scale. You are responsible for ensuring the organization operates efficiently and sustainably. 
  2. Duty of Loyalty: This duty demands that every decision be made solely in the nonprofit’s best interests. Avoid any conflict of interest or appearance of divided loyalties. The question always to ask is: What’s best for the organization? 
  3. Duty of Obedience: This requires that your actions and the decisions you make align with the nonprofit’s mission and legal requirements. Fiduciaries ensure the organization stays true to its purpose and complies with all relevant laws and regulations. Every decision should further your nonprofit’s mission and support compliance, not diverging from either. 

Understanding Your Legal and Financial Responsibilities

Fiduciary roles come with risks and potential liabilities. You can be held accountable for damages caused by your wrongful acts or omissions.  To protect yourself and the organization, it’s essential to ensure compliance with laws, bylaws, and best practices. 

Liability coverage, such as Directors and Officers (D&O) insurance, is one layer of protection. Additionally, your nonprofit must have strong internal controls in place to mitigate financial risks and fraud. Think of yourself as the captain of a ship, ensuring you know the rules of navigation and are prepared for unexpected storms. 

Reducing Risk: Financial Awareness & Internal Controls

Understanding your nonprofit’s financial health is vital for fiduciaries. Familiarize yourself with financial statements and the internal controls that keep the organization secure. A strong “Tone at the Top” is essential to instill a culture of integrity and transparency. This means making it clear that ethical practices and accountability are non-negotiable. 

Fraud prevention is also a crucial aspect of internal controls. According to the 2024 Report to the Nations by the Association of Certified Fraud Examiners (ACFE), nonprofits account for 10% of reported fraud cases, with a median loss of $76,000 per case. This statistic underscores the importance of implementing robust internal controls and regularly reviewing financial practices to safeguard the organization’s future. 

Protecting Your Nonprofit with Policies and Procedures

Internal policies, such as conflict-of-interest and whistleblower policies, help reinforce accountability. These policies support the “Tone at the Top” by establishing clear expectations for ethical behavior. Without a strong policy framework, even small cracks in governance can grow into larger issues over time. 

Establishing these policies is like building a solid foundation for your nonprofit—without them, it’s easy for the organization to be compromised. 

Budgets and Financial Statements: Your Guideposts

A nonprofit’s financial statements and budgets are essential tools for tracking its health . Fiduciaries must not only create and approve budgets but also monitor them throughout the year. This ensures the nonprofit remains on course to achieve its mission. 

Financial statements act as a pulse check on the organization’s operations because truly, they are the financial representation of the activities occurring in the organization. They tell the story of the nonprofit’s financial health and provide insights into areas that may need attention. 

Contributions and Restrictions: Understanding Donor Restrictions

Not all contributions come without conditions. Nonprofits must track and manage restricted and unrestricted donations to comply with donor expectations. Restricted donations may come with specific instructions on how funds can be used, and this must be reflected in financial tracking and reports. 

Just as a donor’s gift may come with agreed-upon designations, your financial reports should accurately reflect any restrictions to ensure transparency and compliance. 

External Parties: Auditors and the IRS

Auditors and the IRS play vital roles in ensuring financial transparency.  While auditors confirm the material correctness of financial statements, the true responsibility for protecting the organization lies with its leadership. Fiduciaries must ensure that the organization is transparent and compliant with legal obligations. 

Additionally, IRS Form 990 is not just a compliance requirement—it’s a public document that reflects the nonprofit’s commitment to transparency and accountability.  

Conclusion

Fiduciary responsibility is key to a healthy organization that can fulfill its mission.  With the right knowledge and proactive practices, you can confidently lead, ensuring your organization remains strong and true to its purpose. 

If you need assistance navigating these waters—whether it’s understanding fiduciary responsibility, implementing internal controls, or meeting your accounting needs—reach out to our team at Chazin & Company. We’re here to support you in safeguarding your nonprofit’s future. 

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Chazin & Company

With over 19 years working exclusively with nonprofits, we pride ourselves in having a unique understanding of nonprofit accounting needs. We believe that nonprofits deserve personalized, quality service and should not settle for a one-size-fits-all approach. We collaborate with you to provide a fully virtual and customized solution that is not only cost-effective but also strengthens your accounting function. We offer a team of industry experts at your disposal to provide advice, leading technology, and to supplement existing staff to improve efficiency and compliance.

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