Does Your Non-profit Organization Need a Physical Examination?

I recently turned the big “5” – “0”, and everyone, friends and family alike, told me I needed to get a physical. It had been a number of years since the last check-up with the doctor. Why do I need a physical? I feel fine (typical “guy” response, right?). Even though things seem to be OK on the outside and there were no noticeable problems that I could identify, how do I know that everything is OK on the inside? I don’t – hence the need for a physical examination.

What about your non-profit organization? Things seem to be going well on the outside – you’re meeting the objectives of your mission; you’re running at or near budget; the Board meets regularly and they seem happy with what they see and hear. So far, so good. But how are things going on the inside? Did you ever read in the paper or hear on the news how there was another theft in a non-profit organization (someone was stealing money over a long period of time), or the local NFP is going out of business due to lack of funding? I‘m sure with these entities that things seemed good on the outside while problems were brewing on the inside over a period of time. Maybe the situation would have been different if the non-profit had a periodic examination.

Here are some ideas to consider for your non-profit organization’s physical examination:

• Board of Director involvement – do you have the right committees focused on key oversight roles, including – audit/finance committee, strategic planning, mission related committees, executive review (addressing performance and compensation of key executives) – and do the people on these committees have the appropriate skills to perform these oversight roles.

• Adequacy of internal controls – consider periodic review and testing of internal controls (can rotate cycles each year – for instance, if the organization has good internal controls in payroll, maybe this cycle doesn’t need to be reviewed each year unless there are major changes in the policies, procedures or personnel).

• External audit – the organization may already be required to have an annual external audit due to state, regulatory, or by some other third party user (i.e. bank or donor). If not, consider obtaining an external audit by an independent accounting firm.

• Initiate/update a fraud/general risk assessment program – identify and evaluate fraud risk factors that may indicate the presence of:

• Incentives or pressures for management, employees, or volunteers to commit fraud.
• Opportunities to commit fraud, usually combined with a belief that the fraud will go undetected.
• Attitudes/rationalizations on the part of management, employees, or volunteers to justify committing fraud.

A tool you may find helpful in this area is “Managing the Business Risk of Fraud: A Practical Guide”. The guide is sponsored by The Institute of Internal Auditors, The American Institute of Certified Public Accountants, and the Association of Certified Fraud Examiners.

• Audit/Finance Committee oversight – this committee is key to making sure the items noted above (and others) are being addressed and the financial affairs of the organization are being monitored. This committee should:

• Work with management to establish financial budgets and assist with monitoring budget vs. actual performance.
•  Ensure the organization has good internal controls (which are reviewed and tested as needed - discussed above).
• Review internal financial statements and make sure they make sense and will be understood by the full Board.
• Participate in selecting external auditors and work with them to understand the results of the external audit and any related communications (i.e. management recommendation letters).
• Review and evaluate investment policies and performance (especially if the organization does not have a separate investment committee).

These are a few ideas to consider and get you started; we’ll discuss these topics in greater detail in the future. For now, the important thing to do is meet with your doctor (management and the Board) and determine the frequency and needs of your physical examination. Don’t procrastinate and wait until there’s a big problem. Do it now while you feel good and things are going well. You never know what’s happening on the inside unless you check. Feel free to contact us if you need a consult or a “second opinion”.