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Are You


on a

By David L. Cotton, CPA, CFE, CGFM

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 5. The Volunteer Protection Act of 1997 outside auditors only need to report
traded companies, most board posi- grants board members immunity from evidence of fraud to the board when:
tions are essentially just honorary posi- personal liability for certain acts in an a. The fraud has a material effect on the
tions. True or false? effort to promote volunteerism. True financial statements.
or false? b. The fraud involves senior manage-
2. If I serve on a board, I can only be sued ment.
personally if: 6. As a board member, I am only autho- c. The fraud involves other board
a. I receive pay for my service on the rized to see the organization’s books members.
board. if such access is specifically allowed d. The fraud involves federal pro-
b. I receive remuneration beyond my by the organization’s bylaws or other grams.
actual expenses of attending board written policies. True or false? e. All of the above.
meetings. f. None of the above.
c. I was present at the board meeting 7. As nonprofit organizations generally g. Only a and b.
at which the actionable decision was operate with low budgets and do not h. Only b, c and d.
made. accumulate assets or reserves, the risk i. Only a, b and d.
d. All of the above. of fraud occurring in a nonprofit is
e. None of the above. relatively low. True or false? 10. Nonprofit board members should:
a. Read and understand the organiza-
3. As a board member, I am automatically 8. The best internal control feature that tion’s bylaws.
covered by the organization’s liability any organization can have in place is: b. Read and understand the organiza-
insurance policies. True or false? a. A policy of only hiring employees tion’s financial statements and audit
who can be trusted. reports.
4. The generally recognized standards of b. A very strong, knowledgeable, c. Read and understand all policies and
conduct that board members must fol- experienced and in-control chief procedures, especially personnel
low are: executive officer. policies and procedures.
a. Duty to attend meetings; duty to be c. A CFO with a background in public d. Attend as many meetings as pos-
objective; and duty to be properly accounting. sible.
prepared for meetings. d. An annual audit. e. Assure that any of her or his dissent-
b. Duty to be financially responsible; e. A knowledgeable and actively in- ing votes on key decisions are noted
duty to read the annual reports; and volved board of directors. in the minutes.
duty to avoid conflicts of interest. f. All of the above. f. Consider obtaining directors’ and
c. Duty of care; duty of loyalty; and g. None of the above. officers’ (D&O) insurance.
duty of obedience. g. All of the above.
d. All of the above. 9. Under current auditing standards (for h. None of the above.
e. None of the above. non-issuer entities), an organization’s i. Only a, b, c and d. w

Nonprofits • Disclosures • May/June 17

Answers insurance may not cover governing board The duty of loyalty means that you must
1. False. Serving on any corporate board members. Waiting until you get sued to find “give undivided allegiance to the organiza-
is a very serious responsibility. As a board out about insurance coverage is too late. Ask tion when making decisions affecting the
member for a nonprofit organization, you about insurance and read any policies before organization… Board members cannot put
will be held accountable for the stewardship agreeing to serve. personal, family or business interests above
of donor contributions. Before you agree 4. c. Duty of care; duty of loyalty; the organization’s interests.”3 As a board
to serve on a board, make sure you fully and duty of obedience. The duty of care member, you must avoid conflicts of inter-
understand your role and responsibilities. is the care that “an ordinarily prudent person est, in appearance or in fact. Fortunately,
Study the organization’s history, structure, would exercise in a like position and under this is an ethical concept with which all CPAs
management and financial stability. Review similar circumstances.” As a board member, are very familiar.
the articles of incorporation, bylaws and re- you are expected to: The duty of obedience means that your re-
cent financial statements and audit reports. sponsibility as a board member is to ensure
Because you have CPA after your name, you •• Attend board meetings regularly that the organization does not stray from its
will probably be held to a higher standard core purpose in its actions. Donors to non-
than your fellow board members. •• Show independent judgment profit organizations must have assurance that
2. e. None of the above. According to donated funds are used only for purposes
BoardSource (formerly The National Cen- •• Be informed about organizational specified in the bylaws, articles of incorpora-
ter for Nonprofit Boards), “even the most activities tion, mission statement or website.
scrupulous conduct provides no guarantee 5. True. Prior to 1997, inconsistent laws
against lawsuits. Indeed, board members are •• Rely on trustworthy information across the country created confusion and in
sometimes named as defendants simply to sources many cases lead to reluctance to volunteer.
add impact to the plaintiff’s case.”1 Conse- The Act is designed to increase volunteerism
quently it is wise to research the organiza- •• Delegate only to responsible individuals by providing a consistent level of protec-
tion’s legal history before agreeing to join tion for volunteers. Generally, as a board
its governing board. •• Follow up regularly to make sure board member, you will be protected if (a) you
3. False. The organization may not directions are carried out2 act within the scope of your responsibilities
even have liability insurance. If it does, that 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
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- cated about nonprofit board member duties
ly, nonprofits often do not have governing and responsibilities.
boards exercising strong oversight. Two other recent publications should be David L. Cotton,
8. e. A knowledgeable and actively “required reading” for any CPA serving on a CPA, CFE, CGFM
involved board of directors. Answers governing board. “Management Override: is chairman of
a–d are all important. Answer e, however, The Achilles’ Heel of Fraud Prevention” Cotton & Company
is the best answer, because a knowledgeable provides valuable insight into a board mem- LLP in Alexandria
and involved board will ensure that those ber’s responsibilities related to overseeing and currently
other attributes are in place. A strong gov- management. It is available at no cost at teaches fraud examination and
erning board will ensure that hiring policies forensic accounting at The George
are sound, keep an overzealous executive in “Managing the Business Risk or Fraud: Washington University. He has
check, assure that proper financial manage- A Practical Guide” contains the attributes served on several nonprofit boards
ment is in place, retain and supervise high- of a sound fraud risk management program during his career. Contact him at
quality auditors and so forth. that an entity that is serious about protect-
9. g. Only a and b. Statement on Audit- ing stakeholder assets should put in place. It
ing Standards (SAS) Number 99, Consider- is available at no cost at
ation of Fraud in a Financial Statement Audit, BusinessRiskFraud.
only requires auditors to report to the audit Serving on a nonprofit board can be a
committee (or equivalent) “fraud involving very rewarding experience. It requires
senior management and fraud (whether a time-consuming commitment. A CPA
caused by senior management or other em- should undertake due diligence before
ployees) that causes a material misstatement agreeing to serve and should serve with
of the financial statements. …” The SAS diligence and dedication. 
also says, however, that “the auditor should 1. Jacqueline C. Leifer and Michael B. Glomb ,
reach an understanding with the audit com- The Legal Obligations of Nonprofit Boards,
(BoardSource 1997), page 5.
mittee regarding the nature and extent of 2. Ibid, page 1.
communications with the committee about 3. Ibid, page 1.
misappropriations perpetrated by lower- 4. Ibid, page 16.
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.

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. is an excellent source of
information for becoming thoroughly edu-

Nonprofits • Disclosures • May/June 19