The Internal Revenue Service has floated a discussion draft of good governance practices for Section 501(c)(3) organizations. Although still preliminary, and not approved at an official level, the guidelines are worthy of review nonetheless. They come in the wake of Sarbanes-Oxley, numerous state legislative efforts to improve corporate governance practices, and Congressional and media concern with the practices of some nonprofit boards.
The IRS’ apparent goal is to discourage a climate of secrecy and neglect, which increases the potential for impermissible private benefit, and encourage charities to hire directors who are "knowledgeable and passionate" about the organization’s programs, with expertise in critical areas involving accounting, finance, compensation and ethics. Interestingly, the IRS believes boards should not be too large (which may encourage inattentiveness) or too small (which does not represent the public interest).
The preliminary guidelines recommend that charities adopt some or all of the following practices:
- Mission Statement
- Fundraising Policy
- Code of Ethics
- Financial Audits
- Due Diligence
- Compensation Practices
- Duty of Loyalty
- Document Retention
- Policy Transparency
Of particular note is the importance placed upon a well-articulated written mission statement, which should guide the board in accomplishing the organization’s work. Moreover, the IRS believes boards should set ethical standards and ensure that they permeate the organization’s practices. Organizations should also have effective whistleblower policies.
Among the other preliminary guidelines is a recommendation that directors not be compensated for their roles as directors, but they may receive reasonable compensation for services provided as officers. Charities are urged to rely on the rebuttable presumption of section 4958 in determining reasonable compensation.
The need for transparency is particularly important. In this regard, the IRS recommends that charitable boards adopt procedures that will ensure the charity’s Forms 990, annual reports and financial statements are complete and accurate, posted on the organization’s public website, and available to the public upon request.
Finally, the preliminary guidelines recommend that charities with substantial assets or revenue, should ensure that an independent auditor conducts an annual audit. Those larger charities should also establish an independent audit committee to oversee the auditor, and the auditing firm should be changed periodically to ensure a fresh perspective. Mid-sized charities should have an independent CPA conduct an annual audit, and smaller charities should enlist volunteers with financial skills to review the organization’s financial information.
We will monitor and keep you informed of developments concerning these preliminary guidelines. In the meantime, please contact one of the individuals in our Exempt Organizations practice should you have any questions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.