Nonprofit Boards: Alert to Financial Red Flags?

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An essential fiduciary duty of your not-for-profit’s board of directors is to oversee and monitor the financial health of your organization. Some financial warning signs — such as the loss of a significant source of income — will clearly stand out. Other financial red flags, however, can be more subtle. 

Trouble with budget issues?

Some budget-related issues may hint at tough financial times ahead. Any organization without a budget suggests an undisciplined approach to fiscal management and should be avoided. However, once a budget is submitted, your board of directors should ensure the budget contains board-developed and approved strategies.

Once the budget is approved by the board, it then needs to be monitored and compared against the proposed budget and actual results. While some discrepancies are expected, management and staff should be able to explain significant differences. For such a difference, there should be a reasonable explanation, such as funding changes or overexpansion. However, the board of directors should avoid overspending in one program that’s funded by another. Other examples of financial red flags include unplanned borrowing, raiding of an endowment, or dips into your nonprofit’s reserves, which may mark the beginning of a downturn in your financial cycles.

Problems with financial statements?

Financial statements that are inconsistent, late, or don’t follow GAAP standards can lead to bad decisions and threaten your nonprofit’s reputation. Inadequate financial statements can also signal understaffing, weak internal controls, or efforts to hide fraud and conceal mismanagement.

Best practice is to send financial statements to the board of directors within 30 days of the close of a period. Larger companies are generally expected to engage outside experts to perform annual audits. The auditing firm should be selected by either the board of directors or the audit committee.

What are some subtle signs of trouble?

Not all warning signs are found in a nonprofit’s financials. If long-term supporters of your nonprofit express concerns over financial choices, board members should pay serious attention. Additionally, the board of directors should also pay attention if staff members begin contacting major donors outside of the usual fundraising cycle.

Another cause for concern is an overreaching executive director. Strategic or spending decisions should never be made without guidance from the board. If an executive oversteps their purview by choosing an auditor without board guidance, this behavior raises numerous flags. It could be considered a bid for a power grab based on dishonesty and financial instability. 

What is your special role?

Board members have a crucial role to play when it comes to the well-being of a nonprofit. Be sure you are providing training to your board to ensure they understand the information and can spot irregularities and warning signs. JLK Rosenberger can assist in recognizing financial red flags and training nonprofit boards. For additional information, please call us at 949-860-9890 or click here to contact us. We look forward to speaking with you soon.