Using Form 990 to Improve Non-Profit Board GovernanceDecember 08, 2014
Michael Hickey, CPA, MBA
In my previous article entitled, Using Your Form 990 for Organizational Improvements, we looked at ways in which an organization can use the form as a tool to improve its organization’s operations. In this installment we look specifically at how the Board of Directors should look at data included in Form 990 and use that as a guide to improve board governance.
Form 990 & Governance
The changes made by the IRS to Form 990 approximately six years ago focus attention on the role of the non-profit organization’s board. These changes required organizations to provide details about board governance, practices and policies. These questions comprise Part VI of Form 990. The answers can indicate whether an organization is well managed and can help directors analyze whether they need to make changes to their organization and its business model. How the organization answers these questions can reassure potential donors and others that assets and funds are being put to proper use.
The responsibility of a board member to govern effectively is the same regardless of how he or she came to serve on the non-profit board. For example, the obligation is the same whether he or she is a major donor, represents a business that has a deep and long-standing commitment to the non-profit or is an individual who was asked to serve because of their standing in the community or passion for the organization’s cause.
Questions in Part VI of Form 990 can help board members sort out how well the group is organized. The questions in Part VI, Section A, ask about the size of the board, how it is constituted, who can vote, who can appoint board members and how the board carries out its authority. The answers here provide insight as to how much independence the board maintains and how the organization operates. These answers clearly show who makes key decisions.
Part VI, Section B, asks an organization to describe its key policies. While the policies themselves are not required by the IRS, governance can be improved if board members review and lay out organizational policies. Through this process, board members can assess where they need to implement new guidelines and/or where existing policies need to be updated. Adoption of a conflict of interest policy and a whistleblower policy, for instance, are signs of good governance, as they indicate a board that is independent and working to protect the organization. It is essential that organizations providing children's services have a child-protection policy.
Several of the Section B questions concern compensation for key organization staff, including how the board sets pay and benefits for these individuals. Having executive compensation parameters and review procedures in place can help organizations avoid embarrassing situations, protracted negotiations concerning pay and criticism from those outside the organization.
Bad publicity that flows from an incident in which poor or absent policies are seen to have played a role can deeply damage the reputation of an organization and its board members, as well as the ability to attract contributions. If the board takes time to review these questions, they may see areas where policies need to be implemented. While we often do not want to think about worse case scenarios, a well governed organization will have policies in place to prevent compromising situations. It is better for the board to be proactive than to be reactive to bad publicity. The latter can be very costly to the individual directors and the organization.
A non-profit organization needs to make information about the organization and its finances available to anyone in the public who wants to see that information. The information in Part VI, Section C, documents how you fulfill that requirement and provides contacts for those looking for information about the organization.
The importance of the board reviewing the governance questions (Part VI) and taking action to make the organization stronger may have value in the near future. What is viewed as good governance may be a key component in reducing the organization’s risk of selection for an IRS audit. In the 2012 report, IRS Exempt Organizations FY 2012 Annual Report and FY 2013 Workplan, the IRS Director of the Exempt Organization Division provided information as to how the IRS may use responses to the governance questions. The 2012 report is the most recent report available and can be found on the IRS website. The report states how the IRS Exempt Organizations Division conducted a study using the answers to the governance questions in Form 990 and compared those responses with audit results of organizations that were already under audit. The report notes that the sample was not representative of all non-profits, but, that in FY 2013, the IRS was going to use a statistical sample of all 501(c (3) and c(4) organizations to verify its findings. While the IRS does not specifically say what its plans are for selecting organizations for audit, reading this report gives a strong indication that the governance answers in Form 990 are going to be a factor in future audit selections.
As a Board member you have the responsibility for the governance of your organization. That does not change with the size or nature of the organization. Take some time to look at your own organization's Form 990 to see how those governance questions are answered and recommend policy changes where appropriate. It is a valuable contribution that you can provide to make the organization that you serve stronger.
Michael Hickey has 30 years of public accounting experience and is a tax manager at BlumShapiro. BlumShapiro is the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation, and financial staffing. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.
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