Saturday, January 20, 2007

Good Advice to Charities

We are often asked at ECFA about giving helpful advice to charities and churches that want to avoid scandal and fraud. A helpful adage is "less is more" and while we have lots of advice, we tend to give a little too much and get a little too technical to be easily remembered let alone implemented.

For purposes of simplicity therefore, I've taken all of the principles and best practices of ECFA as well as other organizations that make recommendations regarding financial accountability and good governance, and have come up with a list of the three main things I would advise all charities to remember:

1) Proper Governance: Defined as an independent board (elders, trustees, members, deacons, etc) consisting of not less than five individuals that are independent-- meaning neither employees nor family members and most importantly independent thinkers. We recommend that this group would meet at least semiannually to review Policies, Performance and Pay (the three "P"'s).

2) Accounting Controls: Too often, nonprofits and especially churches think that blind trust can replace accounting controls and that is sure folly. Professional accounting standards are important to ensure that proper receipts are generated and maintained for both income and expenses and that assets are properly safeguarded. Nonprofits also need to empower their accountants and CPA's and not tell them what rules need to be followed and which ones can be ignored.

3) Transparency: Transparency means "we have nothing to hide". This includes being transparent in sources and uses of all income, expenses, assets, liabilities, etc. All tax-exempt organizations except for churches and some religious charities are required by the Federal Government to file annual a form 990 and provide a copy of the 990 to anyone upon written request. ECFA, for 27 years, has required our accredited members, including those that are normally exempt from the form 990 requirement, to provide a copy of their financial statements to all that provide a written request.

Interestingly, the Panel on the Nonprofit Sector (of which ECFA is a member) and the Independent Sector has recently released a broad proposal which embraces 33 standards for charities which fall into four categories and are very similar to ECFA standards. Information is posted on ECFA's website. Check news and archived stories.

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