Three Risks Facing Nonprofits Today
Even the most successful nonprofits face adversity. For these organizations, funding can be unreliable, resources can be scarce, and risk exposure is almost always more pervasive than that of their for-profit counterparts. Nonprofits must follow the same regulatory and legal guidelines as for-profit businesses, but they are also constrained by both the ethical duties owed to donors and the fiduciary duties owed by their board members to the nonprofit itself. These additional requirements create more opportunities for risk–of asset loss, regulatory failings, and fiduciary duty breaches, to name just a few.
Luckily, these risks can be mitigated with proper planning. But to begin addressing risks, they must first be fully understood.
One of the most critical risks nonprofits face is fraud. Fraud is difficult to combat for any business, but nonprofits’ efforts are often hampered by tight budgets and limited resources. Unfortunately, fraud is a “people problem.” Employees, volunteers, vendors, and even beneficiaries can defraud a nonprofit if they have the opportunity to do so. Because this problem begins and ends with people, the most reliable solution is effective governance.
The “tone at the top” cliché holds true for a reason; engaged management will be the catalyst the nonprofit needs to launch an effective fraud prevention strategy. From there, the nonprofit can educate its employees on fraud risks and establish structures in all levels of the organization to help mitigate those risks.
While the risk of fraud may never be fully eradicated, it can be reduced with a good set of internal controls. A few internal controls that can be implemented are:
- Segregation of financial duties
- Timely reconciliation of accounts
- Time off requirements for employees
- Cross-training of employees
- Frequent bank activity review
- Performance of thorough background checks
It will pay dividends to perform a thorough fraud risk assessment and address any discovered risks before they have the opportunity to morph into true crises.
Nonprofits’ limited resources can get them into trouble when legal contracts come into play. Vendor agreements, for instance, can open up an entity to risk if these contracts aren’t reviewed by an attorney. Something as simple as registering with the local government, which is a requirement when fundraising in a new state, is a task that could be quickly handled by an attorney. Without a lawyer on hand, it can be easy to overlook simple things that put an entity’s well-being at risk. Unfortunately, hiring a lawyer to review vendor agreements, write employment contracts, and analyze lobbying activities can seem like an unattainable luxury.
While it may not be reasonable to have a lawyer review all of a nonprofit’s contracts, it is important to prioritize the role that lawyers play. Capitalize on their efforts by having them draft a generic vendor agreement that can be tweaked when needed. Or pay them upfront to research the scenarios that pose the greatest risk. Find a trustworthy lawyer, set aside money in the budget, and use him or her as a sounding board. Lawyer fees will be a drop in the bucket compared to a lawsuit.
Regulatory compliance can be a heavy burden for nonprofits. Federal tax filings alone can be costly and time consuming, and now many of the provisions in the Tax Cuts and Jobs Act have caused the development of never-before-seen risks. Nonprofits that report unrelated business income must calculate their tax liability differently this year. Taxable activities can no longer be netted against each other; each trade or business must be reported in isolation. Not only that, but some fringe benefits are now taxable as unrelated business income, which could push a filing responsibility onto unsuspecting nonprofits.
Our first recommendation is to confer with a CPA. A trusted and qualified CPA firm can easily tackle compliance issues. Firms that are intimately familiar with nonprofit filing requirements are especially valuable when compliance issues become overwhelming. Utilizing the help of all resources available is crucial; a trusted CPA firm, experienced lawyers, elected officials, and business partners are all excellent sources of assistance with state and federal filing obligations.
And remember: once risks are identified, they are one step closer to being addressed and managed.