"Embezzlement" and "nonprofit": these are two words we never want to hear in the same sentence. Nevertheless, you need only run a search of those two words using any Internet search engine and you will be saddened by what you find. Stories of individuals being charged with, being investigated for, being convicted of and in some cases pleading guilty to embezzling funds from nonprofits across the country are disappointingly common.

This month we thought it would be helpful to review some basic steps you can take, if you are involved with a nonprofit, to try to protect your organization from becoming one of the statistics (and avoid seeing your name, or the name of an organization with which you are affiliated, in the news).

• Governing Documents: Every organization should have certain documents that state the manner in which the organization is to be operated. These documents are usually called a charter (or a certificate of incorporation) and by-laws (or a constitution). Every person who serves on a board should: (a) have copies of these documents, (b) be familiar with their contents, and (c) take an active role in ensuring that the organization is being run in accordance with these documents. If the organization does not operate in accordance with these documents, the board should consider amending the documents to be consistent with the manner in which the organization is operated, or, if the discrepancy arises as a result of improper practices by the organization, making the appropriate changes in operations.
• Regular Meetings: All organizations should hold regular meetings and all board members should attend these meetings. Prior to each meeting, board members should be provided with an agenda and copies of all documents that will be discussed during the meeting. Meetings should be well organized and should include updates of the organization's activities, including the status of its finances.
• Regular Elections: Every organization should hold regular elections both for members of the board and for officers. Organizations should regularly rotate individuals serving in these positions. No one person should serve in any position for an extended period of time (e.g., the treasurer should not serve as the treasurer for 20 years).
• Financial Policies: Every organization should have written policies that set forth the fundamental procedures for handling the organization's funds. This is particularly important for organizations that regularly receive cash donations (e.g., churches that pass offering plates and youth sports organizations collecting cash registrations). Although the policies applicable to each organization may differ depending on the size and activities of the organization, important issues to address include: who will process donations and how; who is responsible for issuing acknowledgment letters to donors; who is responsible for overseeing the investments of the organization; how are conflicts of interest to be addressed; and who is authorized to select vendors.
• Access to Funds: Access to the funds of a nonprofit should be strictly limited. Written policies should be implemented setting forth who is authorized to have access to the organization's funds and under what circumstances additional approvals shall be required (e.g., should checks over a certain amount require prior approval of two officers or a member of the board).
• Credit Cards and Expense Accounts: Every organization that has credit cards or allows expense accounts should have written policies setting forth under what circumstances these items may be used, what back-up documentation is required to substantiate expenses and who will oversee the use of these items.
• Returns and Reports: Back-up documentation such as budgets and general ledgers reconciling the organization's spending with the budget should also be provided and reviewed. Board members should also ask questions about anything appearing in these reports that is not fully understood.
• Audit and Other Review Committees: Depending on the size of the organization, it may be in the organization's best interest for the board to designate certain of its members (who themselves would not have access to the organization's funds) to serve on a committee with the power to oversee and review the organization's finances. Members of such a committee would normally be empowered to review all documents pertaining to the organization's financial affairs and report to the full board its findings on a periodic basis. This committee would also work with the organization's independent accounting firm in connection with the preparation of the organization's annual returns (e.g., IRS Form 990 or IRS Form 990-PF) and except in the case of most small organizations, the organization's audit. These returns and reports should be provided to every member of the board prior to their filing. In addition, these returns and reports should be explained to the entire board so that the board may ask questions about their contents.
• Compensation Committees: A committee may also be empowered to review and make decisions pertaining to the compensation of certain paid management and staff.

Please remember, if you serve on the board of a nonprofit, state law imposes certain fiduciary duties upon you. Thus, you have an affirmative obligation to take steps to ensure that the organization is being run properly. As a general rule, this will not mean that you are a guarantor of everything that happens, but it does mean that you must take appropriate action to minimize the likelihood that a problem will arise.

This is yet another important example of why operating a nonprofit can be a tricky business. The laws impacting nonprofit organizations (including family foundations) are complicated. If you are involved with a nonprofit or are thinking of becoming involved with one, make sure you seek experienced skilled professionals to work with you and your organization. The consequences of missteps in administering the organization can extend far beyond the organization.

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