If you belong to more than one nonprofit board you may have noticed that each one may present a somewhat different set of financial information at board meetings. Do you know what is the appropriate information to present and examine? In order to comply with your fiduciary duty, you should be presented with complete, accurate, and timely financial information. But how do you know that is what you are receiving?
Timeliness – Propose to the board secretary that meetings are set after the closing of each fiscal quarter. This allows sufficient time for management to prepare a set of financial statements that reflect the activity and position through that fiscal quarter. The board should be reviewing financial statements at least quarterly and it makes most sense to review three months at a time.
Accuracy – Are the financial statements prepared on the accrual basis of accounting? You should request that they are since that is the most accurate representation of the organization’s activities and financial position. Are there closings and reconciliations done for each major account in the financial statements?
Completeness – Accounting has two sides and each side needs to be presented for a complete picture. The Statement of Financial Position (equivalent to the Balance Sheet) presents the position of assets, liabilities and net assets (equivalent to equity) of the organization. The Statement of Activities with columns for each net assets with donor restrictions and net assets without donor restrictions should present the results of activities for the year-to-date. Beware of Profit & Loss reports without columns for each class of net assets since it does not present a full picture. For organizations that do not have donor restrictions, the statement can contain only one column but make sure it states that it only represents net assets without donor restrictions. If you are presented with only one of these statements, you may not have important information to discern problems present on the other side. If you are presented a Profit & Loss without these columns, you may be given a skewed view of the results of operations. For example, if the organization just booked a multi-year grant this year, the statement shows a healthy profit as a result, hiding an operational deficit.
Accountability – Insist on reviewing a budget to actual report and on having explanations for the line items with variances of over 10%. The budget approved by the Board is the roadmap for the organization’s management and you want to monitor that this is properly followed.
Dashboards – Dashboards can be presented, but should not be considered as replacements for the basic financial reports listed above. They can enhance the presentation, but do not replace the breadth of information provided by a full set of financial reports.
Even if you do not fully understand the financial statements, receiving a complete set at each meeting promotes accountability and if necessary, allows you to consult with a professional for an opinion on potential issues or the general financial health of the organization for which you have a fiduciary duty.