Role of the Nonprofit CFO in Executive Management: The Watchdog Responsibility

A nonprofit board relies on the CFO to be the backstop.

Standing before the board to report executive fraud or unethical behavior—that’s an image that no CFO likes to contemplate.

The board expects the Executive Director (ED) and CFO to work in partnership to further the mission, but most boards also expect the CFO to perform a “watchdog” function. If the ED is the engine of the bus, the CFO is the insurance, the maintenance, and yes, sometimes the brakes. EDs are subject to human failings like everyone else. Your board relies on you to be the backstop should the ED commit or sanction illegal acts, the fraudulent use of funding, or any other actions which benefit an employee personally at the expense of the organization.

The CFO’s responsibility to the board is a burden that she bears alone. This responsibility encompasses communications with auditors. The board also expects the ED to give the CFO free reign to inform the outside auditors about fraud investigations, related party transactions, active or potential lawsuits, and material changes in funding. The same is true for any audits authorized by funding sources.

Keeping on the ethical high road without alienating your coworkers

Accepting the watchdog burden begins with steadfastly walking the ethical high road. Every person associated with the agency should have no doubt that you place the good name of your organization above all else.

Model ethical behavior with some tips:

• Avoid any appearance of self-aggrandizement
• Refrain from eagerly seeking every available perk
• Pay careful attention to boundaries in your relationships with anyone connected to the organization
• Let your co-workers know that you are there to serve the agency
• Use small gestures (like being the last one out on a snow day) to establish your commitment to your responsibilities as leader

The CFO walks a tightrope between keeping everyone out of jail and avoiding a reputation for being unreasonably rigid or out-of-touch with the realities of running the organization. Without irreproachable integrity, the CFO’s resumé is worthless. However, you can also employ compromise and flexibility while enforcing the rules. I didn’t mind being called a “girl scout,” but I avoided being perceived as a “mindless bean counter.” This would have frustrated the executive team and locked me out of participation in high-level decision-making.

When fires break out: When (& what kind of) an alarm should be raised

While the chances are slim that your ED has anything but the best intentions, here are some hypothetical examples (or “fires”) of management behavior that may or may not require a confrontation and report to the auditors and/or board. In each case, the first fire is a fairly common situation and the second is more concerning. Think through how many alarms you would assign to each of these potential fires. In assigning your alarms, consider legality, materiality, frequency of occurrence, and the degree of harm each fire causes.

1. Incorrect use of sales tax exemption (Note: I speak from my experience in New York State; check your state’s laws on nonprofit tax exemptions for applicability of this example to your nonprofit.)
   • a. The ED frequently meets with people at the local hot spot and pays sales tax every time rather than presenting a tax-exempt certificate.
   • b. The ED is not only buying furniture from a wholesale outlet available to the agency for herself tax-free but has also passed out the sales tax exemption certificate to her friends.
2. Undocumented personal use of vehicle
   • a. The agency recently purchased a vehicle for a program and the ED uses it to commute to and from work (an hour each way) for two weeks.
   • b. The ED uses a dedicated agency vehicle to travel around the state throughout the year. Her home is an hour from the office. She refuses to keep track of personal use of the vehicle.
3. Use of gift cards to reward staff
   Note: IRS rules require that virtually all gifts be reported as compensation.
   • a. The ED gives out $25 gift cards to five managers during the holidays each year.
   • b. The ED gives out approximately 20 gift cards each year to recognize longevity, ranging from $100 to $500 each depending on years of service.
4. Undisclosed related-party transactions
   • a. The ED purchases a vehicle for a program from a relative at a reasonable price but without following protocols for obtaining competitive bids.
   • b. The ED rents a building for $30,000 annually from a close relative whose name does not appear in the name of the partnership acting as the landlord. Rent is above market, but in a desirable location, fitting the needs of the program.
5. Misuse of restricted funding
   • a. The ED approves a program manager’s purchase of a laptop for business use with grant funding when the budget had specified that laptops would be used by the direct care workers.
   • b. The ED purchases a $10,000 copier for the human resources office with grant funds awarded for emergency food during a natural disaster. The grant did not include funding or any indirect costs or equipment.

How to put out small fires

Over time, most CFOs will encounter situations similar to the “a” version of at least some of these examples. Sometimes it’s okay to pick your battles. If the incident is isolated, you can let it go, but keep your eyes open for repeat occurrences.

But if you think that a trend is starting, you may be able to stop it with a casual comment during a regular meeting with the ED: “Hey, we really should create a policy for holiday and recognition gifts. I know that the program managers would rather do gift cards than payroll checks, but gifts to staff have to go on their W2s.”

If you suspect that grant money is being misused, factor in the amount of the expense in relationship to the total awarded amount before you step in. You might be wrong, or the situation might be a teaching moment for a program manager if you approach him with care. If your suspicion is confirmed, you will have to reclassify the expense, whatever the size, so that it does not appear on a request for reimbursement from the funder.

How to combat wildfire

Because of their magnitude, the “b” versions rise to the level of illegal acts. #1 is clearly an example of fraud. #2 is an example of self-dealing and violates IRS law. #3 also violates IRS law. #4 is a conflict of interest that should be disclosed in the financial statements and on the 990, although more investigation is needed to determine additional steps to be taken. #5 is fraud and puts the organization at risk with its funders.

You may be able to head off disaster if you can draw on a friendly and trusting relationship with your ED. The challenge is finding the right approach to alerting her of potential issues without offending, appearing to challenge her authority, or giving the appearance of threatening to “tell.” Inexperienced EDs may require some education in the concepts of self-dealing, federal and state laws, and conflicts of interest. They may be unaware of the IRS rules concerning personal use of vehicle or the right and the wrong way to do business with related parties.

The rules of the game

In severe cases where your education efforts and friendly reminders have failed, you will have to tell the ED that you cannot overlook the problem and will have to inform the auditors and possibly the board. If the auditors advise you that the situation must be reported to the board, you will have to comply, and this will put your job on the line. But keep in mind that this is what you signed up for when you chose this career, and you will not fare any better than the ED if improprieties or worse are discovered that you should have known about.

These responsibilities are serious, but the good news is that the odds are high you will find solutions when difficulties arise. EDs are usually driven by their passion for the mission rather than self-aggrandizement. Your charge is not just to alert your ED to legal and accounting constraints but also to help her work within those constraints. You can use the CFO toolbox to appropriately record the wine served at a board function or the ED’s use of a dedicated vehicle, as well as to adequately disclose lease payments for a property rented from a related party. The ED and the board will be relieved and grateful to tap into your expertise as they strive for both maximum effectiveness and impeccable integrity.

In case you missed it…

Role of the Nonprofit CFO in Executive Management: The CFO-ED Relationship

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