Ready

Are You

Serve
to

Nonprofit
on a

Board?
By David L. Cotton, CPA, CFE, CGFM

A
s an accountability profes-
sional, sooner or later, every
CPA will likely be asked to
serve on the governing board
of a nonprofit organization. A
CPA’s training and expertise can add a great deal to
the quality of corporate governance. But the decision
to accept a board position should not be taken lightly
or made hastily. The following quiz can help you as-
sess whether you are ready to accept the challenge
of governance. See page 18 & 19 for quiz answers
and explanations.

16 Nonprofits • Disclosures • May/June

1. Except for corporate boards of publicly
traded companies, most board posi-
tions are essentially just honorary posi-
tions. True or false?
2. If I serve on a board, I can only be sued
personally if:
a. I receive pay for my service on the
board.
b. I receive remuneration beyond my
actual expenses of attending board
meetings.
c. I was present at the board meeting
at which the actionable decision was
made.
d. All of the above.
e. None of the above.
3. As a board member, I am automatically
covered by the organization’s liability
insurance policies. True or false?
4. The generally recognized standards of
conduct that board members must fol-
low are:
a. Duty to attend meetings; duty to be
objective; and duty to be properly
prepared for meetings.
b. Duty to be financially responsible;
duty to read the annual reports; and
duty to avoid conflicts of interest.
c. Duty of care; duty of loyalty; and
duty of obedience.
d. All of the above.
e. None of the above.
Nonprofits • Disclosures • May/June 17
5. The Volunteer Protection Act of 1997
grants board members immunity from
personal liability for certain acts in an
effort to promote volunteerism. True
or false?
6. As a board member, I am only autho-
rized to see the organization’s books
if such access is specifically allowed
by the organization’s bylaws or other
written policies. True or false?
7. As nonprofit organizations generally
operate with low budgets and do not
accumulate assets or reserves, the risk
of fraud occurring in a nonprofit is
relatively low. True or false?
8. The best internal control feature that
any organization can have in place is:
a. A policy of only hiring employees
who can be trusted.
b. A very strong, knowledgeable,
experienced and in-control chief
executive officer.
c. A CFO with a background in public
accounting.
d. An annual audit.
e. A knowledgeable and actively in-
volved board of directors.
f. All of the above.
g. None of the above.
9. Under current auditing standards (for
non-issuer entities), an organization’s
outside auditors only need to report
evidence of fraud to the board when:
a. The fraud has a material effect on the
financial statements.
b. The fraud involves senior manage-
ment.
c. The fraud involves other board
members.
d. The fraud involves federal pro-
grams.
e. All of the above.
f. None of the above.
g. Only a and b.
h. Only b, c and d.
i. Only a, b and d.
10. Nonprofit board members should:
a. Read and understand the organiza-
tion’s bylaws.
b. Read and understand the organiza-
tion’s financial statements and audit
reports.
c. Read and understand all policies and
procedures, especially personnel
policies and procedures.
d. Attend as many meetings as pos-
sible.
e. Assure that any of her or his dissent-
ing votes on key decisions are noted
in the minutes.
f. Consider obtaining directors’ and
officers’ (D&O) insurance.
g. All of the above.
h. None of the above.
i. Only a, b, c and d. w
Answers
1. False. Serving on any corporate board
is a very serious responsibility. As a board
member for a nonprofit organization, you
will be held accountable for the stewardship
of donor contributions. Before you agree
to serve on a board, make sure you fully
understand your role and responsibilities.
Study the organization’s history, structure,
management and financial stability. Review
the articles of incorporation, bylaws and re-
cent financial statements and audit reports.
Because you have CPA after your name, you
will probably be held to a higher standard
than your fellow board members.
2. e. None of the above. According to
BoardSource (formerly The National Cen-
ter for Nonprofit Boards), “even the most
scrupulous conduct provides no guarantee
against lawsuits. Indeed, board members are
sometimes named as defendants simply to
add impact to the plaintiff’s case.”1 Conse-
quently it is wise to research the organiza-
tion’s legal history before agreeing to join
its governing board.
3. False. The organization may not
even have liability insurance. If it does, that
insurance may not cover governing board
members. Waiting until you get sued to find
out about insurance coverage is too late. Ask
about insurance and read any policies before
agreeing to serve.
4. c. Duty of care; duty of loyalty;
and duty of obedience. The duty of care
is the care that “an ordinarily prudent person
would exercise in a like position and under
similar circumstances.” As a board member,
you are expected to:
•• Attend board meetings regularly
•• Show independent judgment
•• Be informed about organizational
activities
•• Rely on trustworthy information
sources
•• Delegate only to responsible individuals
•• Follow up regularly to make sure board
directions are carried out2
The duty of loyalty means that you must
“give undivided allegiance to the organiza-
tion when making decisions affecting the
organization… Board members cannot put
personal, family or business interests above
the organization’s interests.”3 As a board
member, you must avoid conflicts of inter-
est, in appearance or in fact. Fortunately,
this is an ethical concept with which all CPAs
are very familiar.
The duty of obedience means that your re-
sponsibility as a board member is to ensure
that the organization does not stray from its
core purpose in its actions. Donors to non-
profit organizations must have assurance that
donated funds are used only for purposes
specified in the bylaws, articles of incorpora-
tion, mission statement or website.
5. True. Prior to 1997, inconsistent laws
across the country created confusion and in
many cases lead to reluctance to volunteer.
The Act is designed to increase volunteerism
by providing a consistent level of protec-
tion for volunteers. Generally, as a board
member, you will be protected if (a) you
act within the scope of your responsibilities
as a board member; (b) your CPA license
is current; and (c) you do not engage in
criminal conduct, reckless misconduct or

Impress the Big Dogs

gross negligence.
But, remember, while the Act may pro-
tect you from liability in the areas it covers,
it cannot prevent you from being sued.
Nothing impresses management or clients like 6. False. As a board member, you have
finding anomalies not previously detected. a responsibility to stay sufficiently informed
to be able to fulfill your responsibilities.
Even if a board member’s right to access
Identify control and transaction issues books and records is not specifically stated
before they become a problem for in the bylaws or other policies, every board
your organization or client with member has a “legally implied right to the
IDEA® – Data Analysis Software. information necessary”4 to properly govern
the organization.
Access and analyze large 7. False. A recent Google search on “em-
volumes of data in seconds to: bezzlement & nonprofit” generated 243,000
 Identify errors and detect fraud hits. A search on “fraud & nonprofit” yielded
 Extend your auditing capabilities 2,800,000 hits. The fact of the matter is
Meet documentation standards

that nonprofit organizations tend to be
very vulnerable to fraud for a variety of
reasons. Nonprofits often rely heavily on
volunteer workers who may not go through
the normal vetting process that employees
undergo. Nonprofits are often unwilling
to spend resources on establishing strong
IDEA is a registered trademark of CaseWare International Inc.
internal controls. Nonprofits sometimes
have autocratic and overly controlling chief
For a free demonstration CD of IDEA,
contact us at audimation.com
executives or top management. Unlike for-
or call 888-641-2800. profit entities, nonprofits often do not have
clear and measurable relationships between

18 Nonprofits • Disclosures • May/June

revenues, expenses and outputs. And final-
ly, nonprofits often do not have governing
boards exercising strong oversight.
8. e. A knowledgeable and actively
involved board of directors. Answers
a–d are all important. Answer e, however,
is the best answer, because a knowledgeable
and involved board will ensure that those
other attributes are in place. A strong gov-
erning board will ensure that hiring policies
are sound, keep an overzealous executive in
check, assure that proper financial manage-
ment is in place, retain and supervise high-
quality auditors and so forth.
9. g. Only a and b. Statement on Audit-
ing Standards (SAS) Number 99, Consider-
ation of Fraud in a Financial Statement Audit,
only requires auditors to report to the audit
committee (or equivalent) “fraud involving
senior management and fraud (whether
caused by senior management or other em-
ployees) that causes a material misstatement
of the financial statements. …” The SAS
also says, however, that “the auditor should
reach an understanding with the audit com-
mittee regarding the nature and extent of
communications with the committee about
misappropriations perpetrated by lower-
level employees.” As a CPA serving on a
nonprofit board, you should make clear to
your auditors that you want them to report
every indication of potential fraud that they
observe or suspect.
10. g. All of the above. Before saying
“yes” to an invitation to join a noprofit’s
governing board, you need to carry out “due
diligence.” Read and understand the bylaws,
financial statements, mission statements and
audit reports. Once you say yes, attend as
many meetings as possible. Because the min-
utes are the board’s formal meeting records,
make sure that your dissent on any major or
key issues is clearly noted. Finally, consider
your exposure to liability and ensure that
you have appropriate insurance coverage.
cated about nonprofit board member duties
and responsibilities.
Two other recent publications should be David L. Cotton,
“required reading” for any CPA serving on a CPA, CFE, CGFM
governing board. “Management Override: is chairman of
The Achilles’ Heel of Fraud Prevention” Cotton & Company
provides valuable insight into a board mem- LLP in Alexandria
ber’s responsibilities related to overseeing and currently
management. It is available at no cost at teaches fraud examination and
www.vscpa.com/ManagementOverride. forensic accounting at The George
“Managing the Business Risk or Fraud: Washington University. He has
A Practical Guide” contains the attributes served on several nonprofit boards
of a sound fraud risk management program during his career. Contact him at
that an entity that is serious about protect- dcotton@cottoncpa.com.
ing stakeholder assets should put in place. It
is available at no cost at www.vscpa.com/
BusinessRiskFraud.
Serving on a nonprofit board can be a
very rewarding experience. It requires
a time-consuming commitment. A CPA
should undertake due diligence before
agreeing to serve and should serve with
diligence and dedication. 
1. Jacqueline C. Leifer and Michael B. Glomb ,
The Legal Obligations of Nonprofit Boards,
(BoardSource 1997), page 5.
2. Ibid, page 1.
3. Ibid, page 1.
4. Ibid, page 16.

Grading your quiz

If you scored 90 percent or better, con-
gratulations! You have a solid understanding
of the seriousness of serving on a governing
board, and you are ready to accept an invita-
tion to serve.
If you scored below 90 percent, you
would be wise to study the responsibilities
further before agreeing to accept a govern-
ing board position. BoardSource (www.
boardsource.org) is an excellent source of
information for becoming thoroughly edu-

Nonprofits • Disclosures • May/June 19