A Board-Staff Agreement for Financial Accountability

Clarify your board and staff’s roles in a partnership for accountability.

Not all board members need to be familiar with financial terms and concepts, but each organization needs to develop a clear and explicit agreement for how financial accountability will be ensured. The following is a starting point for an agreement that the board and staff can make to ensure a partnership for accountability.

Starting with this template, a discussion on the finance committee with the executive director and the finance staff will go a long way towards clarifying roles.

Sample Board-Staff Agreement for Financial Accountability

Tax and Legal Responsibilities

The Board will:

• Formally approve any tax and legal settlements
• Work closely with staff to respond to notification of possible tax problems and develop plans for resolving tax and legal problems

The Staff will:

• Immediately notify the board with complete information related to any delays in payroll, payroll tax payments or any legal matters
• Immediately notify the board of any tax problems or penalties
• Immediately notify the board of any legal suits

Accounting

The Board will:

• Form a finance committee of members who understand financial information and standard accounting terms and practices
• Carefully read financial information
• Ask questions to be sure the statements are understood
• Periodically review key accounting policies, such as depreciation and cash or accrual basis statements
• Be patient when statements are occasionally late or infrequent accounting problems occur

The Staff will:

• Complete monthly or quarterly statements within three weeks of the end of the month:
  • Income and expense statement for each major program and for the organization as a whole (should include statements for the previous month and on a year-to-date basis)
  • Balance sheet for the organization as a whole
  • For large organizations with substantial restricted funds or an endowment fund, a balance sheet for the restricted funds
  • Comparison of actual to budget on a year-to-date basis for the organization and, if appropriate, for each program
• Send statements to finance committee in advance of meeting
• If the statements are not available, explain the delay and estimate a date by which the statements will be completed
• In a timely manner, prepare end-of-year statements, Federal Form 990, and other federal and state forms

Tax and Legal Responsibilities

The staff will:	The board will:
Immediately notify the board with complete information related to any delays in payroll, payroll tax payments or any legal matters	Work closely with staff to respond to notification of possible tax problems and develop plans for resolving tax and legal problems
Immediately notify the board of any tax problems or penalties	Formally approve any tax and legal settlements
Immediately notify the board of any legal suits

Accounting

The staff will:	The board will:
a) Complete monthly or quarterly statements within three weeks of the end of the month: – Income and expense statement for each major program and for the organization as a whole (should include statements for the previous month and on a year-to-date basis) – Balance sheet for the organization as a whole – For large organizations with substantial restricted funds or an endowment fund, a balance sheet for the restricted funds – Comparison of actual to budget on a year-to-date basis for the organization and, if appropriate, for each program	Form a finance committee of members who understand financial information and standard accounting terms and practices
b) Send statements to finance committee in advance of meeting	Carefully read financial information
c) If the statements are not available, explain the delay and estimate a date by which the statements will be completed	Ask questions to be sure the statements are understood
d) In a timely manner, prepare end-of-year statements, Federal Form 990, and other federal and state forms	Periodically review key accounting policies, such as depreciation and cash or accrual basis statements
	Be patient when statements are occasionally late or infrequent accounting problems occur

Budget

The staff will:	The board will:
Develop a proposed budget by program and for the organization as a whole	Develop parameters for staff to guide preparation of the draft budget, such as maximum allowable deficit for the year, reduction of days payable, or additions to cash reserve
Have the authority to make minor changes (such as shifting dollars among line items, or making increases in variable costs that are matched by increases in earned revenue) in the budget without board approval	Give careful attention to budget reports
If significant budget variances occur, explain the variances and proposed action such as better attention to budget control or revised end-of-year projections	Engage in long-term planning for funding, such as identifying a target mix of contributed and earned monies. Formally accept the budget, thereby authorizing the beginning of operations as planned

In Cash Flow Projections,

The staff will:

• If appropriate for the organization, prepare monthly, quarterly or annual cash flow projection;
• If appropriate, prepare a comparison of actual to projected cash flows;
• If cash flow shortages are projected, develop a plan for bridging the shortages; and
• If cash flow surpluses are projected, develop a plan for maximizing investment.

The board will:

• Pay attention to cash flow reports; and
• Determine whether preparation of cash flow reports provides important enough information to justify the staff time required.

In Financial Analysis,

The staff will:

a) Prepare brief written narrative monthly or quarterly including the following:

• Highlights of recent period;
• Outstanding and/or anticipated problems;
• Anticipated opportunities;
• Analysis of financial health; and
• Comments on recent financial performance.

b) As part of the annual budget preparation or at another key juncture:

• Investigate and analyze outside trends affecting the organization’s finances;
• Revisit key decisions related to assets and liabilities, such as mortgages, debt, investments; and
• Prepare vertical and, if possible, horizontal analyses.

The board will:

• Propose items for ad hoc investigation;
• Discuss analyses with staff;
• work with staff to improve financial performance; an
• In the absence of the expertise on staff, one or more individual board members may be able to do some of the analysis.

In relation to the Audit and Internal Controls,

The staff will:

• If audited, ensure that audited statements and management letter are completed within four months of the end of the fiscal year;
• Prepare a written response to comments and recommendations in the management letter; and
• Develop a written set of internal controls and follow procedures in spirit as well as to the letter.

The board will:

• Determine whether or not an audit is appropriate;
• Take the lead in interviewing prospective auditors and review of bids;
• Select the auditor;
• Meet at least once per year with auditor when no staff is present;
• Receive audit letter directly from auditor; and
• Review written internal control procedures.

In relation to the Budget,

The staff will:

• Develop a proposed budget by program and for the organization as a whole;
• Be given the authority to make minor changes (such as shifting dollars among line items, or increases in variable costs that are matched by increases in earned revenue) in the budget without board approval; and
• If significant budget variances occur, explain the variances and proposed action such as better attention to budget control or revised end-of-year projections.

The board will:

• Develop parameters for staff to guide preparation of the draft budget, such as maximum allowable deficit for the year, reduction of Accounts Payable, etc.
• Give careful attention to budget reports;
• Engage in long term planning for funding, such as identifying a target mix of contributed and earned monies; and
• Formally accept the budget, thereby authorizing the beginning of operations as planned.

In Salaries and Personnel,

The staff will:

• Prepare an annual schedule showing each staff person and that person’s salary for the Finance Committee and/or Personnel Committee; and
• Prepare an annual schedule of individuals to whom 1099s were issued, and the amounts.

The board will:

• Establish salary ranges for each category of employee;
• Approve guidelines for performance-based compensation, if appropriate;
• Negotiate and approve the executive director’s salary;
• Ensure that other salaries are within approved salary ranges, or if not, to have approved exceptions;
• Approve personnel policies; and
• Periodically review employee benefits.

Overall

The staff will:

• Make a good faith effort to communicate all significant information
• Ungrudgingly complete requests for ad hoc reports;
• Appreciate that tough questions are appropriate and not hostile;
• Have good answers

The board will:

• Give serious attention to financial information; Be understanding when problems occur;
• Make only reasonable requests for ad hoc reports;
• Work as problem solvers as well as governors;
• Be willing to ask “tough” questions;
• Respect the difficulty of the work, and express appreciation when appropriate;
• Ask good questions

This agreement should be discussed and renewed when there is a new board treasurer or a new staff head of finance.

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See also in Blue Avocado:

• Finance Fear Factor Ratios
• Five Internal Controls for the Very Small Nonprofit
• A Nonprofit Dashboard and Signal Light for Boards
• The Nonprofit Board’s Role in HR