Every organization evolves. Boards turnover, communities change and reporting requirements receive updates. Not-for-profit organizations need to make continuous adjustments at every level of their operations in order to keep pace with shifting responsibilities.
Approaching updates with a “housekeeping” frame of mind may help your organization make the minor adjustments it needs to meet any new requirements. Periodic reviews of financial statement reporting processes, bylaws, board policies and mission statements help identify discrepancies between what the organization says it’s doing on paper and what activities it puts into practice.
Organizations with outdated processes, practices and mission statements run the risk of compliance issues, legal liabilities and, in the case of an inaccurate mission statement and activities, putting an organization’s tax-exempt status at risk. Spring is an optimal time for housekeeping-type reviews because not-for-profits can make adjustments before their reporting year ends and the next begins.
The IRS is on the lookout for signs of “mission creep,” or activities that fall outside of the realm of an organization’s expressed tax-exempt purpose. Not-for-profit organizations include their mission statement as part of their application for tax-exempt status, and regulators want to see that the primary activities of the organization are fulfilling that purpose.
Organizations run an especially high risk of mission creep when they embark on new ventures that could bring in revenue, such as renting facility space. Such activities are naturally enticing, but organizations need to be careful regarding such ventures. If it appears that a substantial amount of activities and resources are being put toward activities that do not fulfill the organization’s mission statement, the IRS could revoke the organization’s tax-exempt status.
Not-for-profits should also compare their mission statement to their activities and monitor for any substantial differences. Even activities that are charitable in nature could fall outside of the organization’s expressed charitable purpose as approved by the IRS when the organization’s tax exemption application was approved. If the organization wants to devote resources into a different focus area, it may need to reapply for tax exemption with a new charitable purpose.
When conducting a review of financial reporting processes, not-for-profit organizations should focus efforts on the elements that pose the largest compliance risk.
Net assets require careful monitoring, particularly those that have restrictions. Changes in net assets are reported as part of year-end financial statements. Thorough and accurate record keeping makes year-end net asset reporting easier. Entities should track donor restrictions on net assets as they come in and keep an eye on what happens to assets when restrictions are released.
Endowments are another key compliance concern for not-for-profits. Organizations with endowments should review their investment policies, their endowment accounting methods and how endowments are used and maintained to ensure they’re being managed consistent with their spending policies. Boards, CFOs and finance committees should also be periodically updated on endowment performance. During periods where endowment investments are underperforming, spending from the endowment may need to be limited or temporarily stopped.
Bylaws should be reviewed at least once every other year. Insurance policies and employment practices should be reviewed every year. Case law and changes to state statutes may affect bylaw provisions, and it is important to ensure those updates are incorporated into your organization’s governance documents.
Employment documents may also need to be updated. As the organization evolves, so may the responsibilities of your staff. To clarify job responsibilities and minimize employment-related liabilities, organizations should verify that job responsibilities are appropriately covered in employee resources and training materials.
Emerging risks may also necessitate an update to employment language. Cybersecurity threats have been increasing across the board, and employment handbooks should include language and guidance on the role employees can play in an information security incident.
Charters should reflect the powers of the board and the role the board plays in organizational decision-making. An organization’s description of its board can be unclear or it may not include the full power of the board within the organization. When a board’s charter does not cover all of the board’s responsibilities, the actions taken outside of the board’s expressed responsibilities may be invalid.
Not-for-profit organizations should also keep their board updated on the organization’s full range of activities. When a board doesn’t understand how the organization manages its resources or the types of activities it conducts, that sends a red flag to regulators that the organization may be operating outside of its expressed charitable purpose.
Working with a legal advisor and an accounting professional can help your organization verify that it is meeting all of its requirements. For more information, please contact us.
Heather Hernandez is a Senior Manager in the San Diego office of CBIZ & MHM. She assists not-for-profit organizations with a range of accounting and financial advisory services. She can be reached at 858.795.2063 or HHernandez@cbiz.com.
Guest contributor Jon Grissom is a partner with Henderson, Caverly, Pum and Charney, LLP. His primary practices are tax-exempt organizations, business and corporate law, and tax. He can be reached at 858.755.3000 or firstname.lastname@example.org.