Increasingly boards of directors for charities are expected to strengthen their governance practices, including their fiduciary and risk oversight. Driving this demand for stronger governance is research that finds that governance failures are at the root of many problems in charities.
In response, regulators and funders are taking steps to codify expectations and sanction charities that do not meet expectations. For example, the pending Ontario Not-for-profit Corporations Act expected to come into force in 2016 will strengthen board governance with heightened attention to strong fiduciary responsibilities and include penalties for organizations that breach the act. Provincial funders such as the Ministry of Community and Social Services are taking steps to strengthen oversight and accountability of their funded agencies and implementing sanctions for those that don’t comply. Charity watchdogs are evaluating charities and influencing donors.
The consequences are severe for organizations that don’t measure up. Loss of government and public funds, damage to reputation, loss of charitable status, along with personal liability for directors including fines and imprisonment are all real possibilities. Here are three steps boards of directors can take to improve fiduciary and risk oversight and ultimately strengthen governance.
1. Build risk and financial intelligence at the board
Boards need to satisfy themselves that financial risk is managed in the organization. Increasingly directors are called to demonstrate diligence in their decision making as evidenced by adequate scrutiny of issues prior to making a decision. This requires knowledge and capacity to understand the information presented by management, ask the right questions, and make informed decisions.
Ensuring the board continually has the right skills at the table starts by identifying skills and knowledge gaps and then finding ways to fill the gaps. Changing expectations requires a process that monitors current and emerging governance standards including those related to risk and financial accountability. Keep in mind legislation and regulations hold the entire board accountable so avoid the temptation to rely on one person or committee as the expert.
2. Oversee financial risk
Rigorous risk management will strengthen boards’ oversight of the financial risks threatening the organization. An objective centric framework provides good value for charities as it makes the best use of scarce human and financial resources. The objective centric approach starts with the objective and analyses risks or threats to achieving the objective. Boards can approve financial objectives in such areas as accuracy and reliability of financial statements, financial health and stability, cash flow, solvency, and debt obligations.
Analyzing risks to the objectives will require management to report to the board on factors that increase risk such as increased use of debt, opportunity for fraud, cash flow issues, changing accounting standards or reporting requirements. In fulfilling its oversight role, the board must satisfy itself that management is taking the appropriate steps to manage the financial risk to an acceptable level for the organization.
3. Seek Assurance on internal controls
In addition to the above two actions, heightened attention to internal controls is recommended. Specifically the board should satisfy itself that management has implemented internal controls to safeguard the assets of the agency as well as ensure reliable and accurate financial information.
The board should educate itself on fraud indicators and then ensure management has taken action. The board should ask management to regularly report on the state of internal controls and that it has responded to any auditors’ recommendations. Periodically the board should consider independent assessment of the internal control environment. This can include a peer review by another organization or engaging the help of an external advisor. To ensure independence the external advisor should be someone other than the auditor.
Angela Byrne, president of Angela Byrne Consulting Inc., is passionate about helping organizations develop good structure and processes that manage risks and deliver results. She has extensive knowledge of charities and has worked with a number of organizations across Ontario. Angela is a Chartered Professional Accountant, Certified Management Accountant, Certified Internal Auditor and holds a Certification in Risk Management Assurance. She can be reached at email@example.com.