Tone at the Top: 25 Questions to Ask at Board Meetings

TONE AT THE TOP Oversight by Inquiry: 25 Questions to Ask at Board Meetings Robert P. Seestadt, CPA

©2009 Robert P. Seestadt All Rights Reserved Go to www.cfoshare.com for more ideas and tools on nonprofit financial oversight

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Establishing “tone at the top” is a key responsibility of nonprofit board members, communicating the importance of oversight, integrity, and strong internal controls to management and staff

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Table of Contents

What is “tone at the top”?.........................................................4 Using inquiry to gain insight…………………..………………………………..5 The management letter as oversight tool…………………………………12 Acknowledgements and more information………………………………13



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TONE AT THE TOP What is Tone at the Top? In a nonprofit organization, the board has a significant responsibility for ensuring that management has adequate internal controls in place. Although the audit committee usually leads this effort, the board at large must actively support it as well. Internal control is often defined as a process, overseen by the board of directors, management and others designed to assure that financial statements are reliable, laws and regulations are in compliance, and operations are running smoothly. In this regard, the organization’s control environment is a key element of the internal control structure. Control environment, often referred to as “tone at the top” refers to the integrity and dedication that the board and management convey to the entire organization’s internal control system. Although tone at the top is a qualitative aspect of internal controls, it’s importance should not be diminished. According to many professionals, tone at the top is considered to be the fundamental control feature for an organization, providing credence and value to all other internal control elements. As you will see throughout this document, simple curiosity, listening, and care for the organization all contribute significantly to improving tone at the top. These actions will also improve the overall board effectiveness on many other fronts. Robert P. Seestadt, CPA



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TONE AT THE TOP Using Inquiry to Gain Insight

The simple act of asking questions, either at board meetings or during one-on-one sessions with the executive team, can be an effective way to establish tone at the top. Below are some questions to consider asking to gain insights as a board member. Ideally, these questions will be enable open-ended responses from the management team, sometimes leading to a more strategic discussion. If responses tend to be more “yes” and “no”, consider asking in a more open-ended way.

1. WHAT SURPRISED YOU? This simple question can facilitate a discussion about deviations from organizational plan and changes in the economic environment. For example, a response such as an unexpected dropoff in certain program revenues may drive a discussion and further research on recent trends and red flags

2. How STRONG ARE OUR CASH RESERVES?? Many organizations lack adequate cash reserves, unable to withstand revenue downturns in tough times. Organizations should develop short and long-term cash projections to assess vulnerabilities. Tip: Create a weekly roll-forward cash projection and update it regularly (each month, etc)

3. HOW DO YOU ASSESS OUR UTILIZATION? Nonprofit organizations have to maximize the number served based on their current and planned capacity. Low utilization is an indicator of wasted



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resources. Consistently high utilization can indicate the need for capital, staffing or other investment to adequately serve organizational mission. Tip: Ask management to measure organizational “utilization” by dividing actual number served for the year by the maximum number that could have been served based on organizational capacity. Discuss the outcomes and compare to goals and expectations.

4. WHAT IF OUR BUILDING BURNS DOWN? Insurance and data backup coverage should be reviewed periodically to assure that if the worst case scenario occurs, the organization can withstand the financial and information technology damage incurred. Tip: Periodically test your data backup system as though your existing hardware was destroyed

5. IS OUR BUDGET REALISTIC? Nonprofit executives tend to look at the future with optimism. Board members and management need to assure that this “glass half full” outlook does not create unrealistic budget assumptions, making the organization vulnerable if the “best case scenario” does not materialize.

6. HAVE WE REVIEWED OUR INSURANCE COVERAGE LATELY? Things change. It’s always a good idea to keep your agent apprised of new ventures, changes in the facility and operations of your nonprofit organzation to make sure that coverage matches exposure.



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7. HOW HAVE NEW IRS FORM 990 DISCLOSURE REQUIREMENTS AFFECTED US? The IRS has recently overhauled the disclosure requirements in the annual form 990. Organizations should make sure that they understand the disclosure requirements and are consider the adoption of new policies as deemed appropriate. Tip: Ask your audit firm for a summary of the 990 changes

8. WHICH PROGRAMS GENERATE SURPLUSES? WHICH INCUR DEFICITS? Over time, nonprofit organizations have a tendency to add and expand programs without assessing their return on investment. Of course, not all programs are intended to generate a “surplus”, but it is important for board members and management to understand the extent of program subsidization.

9. WHAT WOULD CAUSE US TO MISS OUR FINANCIAL PROJECTIONS? By asking this question, a board member can navigate the root assumptions used to assess the financial outlook of the organization. Sometimes, financial projections are entirely reliant on one or two pending “asks” turning into gifts. By understanding the architecture behind the financial assumptions, vulnerabilities can be more accurately understood.

10. ARE ANY KEY PLEDGES LIKELY TO BECOME UNCOLLECTIBLE? It’s not enough to secure funding commitments from donors – you have to actually collect the funds as expected. This places nonprofit recipients in the uncomfortable, but critical, role of collection agency for pledge payments that linger beyond scheduled timeframes. Unfortunately, significant pledge payment issues can affect the sustainability of nonprofit organizations.



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11. ARE WE DEPENDENT ON A SMALL NUMBER OF FUNDING SOURCES? Organizations that are reliant on a handful of large gifts and grants may be vulnerable to cutbacks or changes in donor funding strategy. It’s best to acknowledge the potential impact of such changes before they occur.

12. WHAT OPPORTUNITIES DO WE HAVE TO GROW REVENUE? With so much focus on organizational challenges, the flipside of assessing opportunities can be overlooked. During times of uncertainty and change, organizations should focus more than ever on strategic growth opportunities to drive revenue growth.

13. HOW CAN WE HELP? Sometimes management is reluctant to seek help and guidance from board members for various reasons. Sometimes simply offering a helping hand can open the door to improving financial communication, planning and reporting.

14. HOW DO WE COMPARE TO OUR PEERS? Benchmarking against successful organizations in your sector can lead to ideas and actions for improvement, effectively raising the standards of measurement for future success. Tip: Reach out to peer organizations to see if they would be willing to share data. Also consider using public databases such as Guidestar.org for additional benchmarking data



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15. WHAT ARE OUR CRITICAL SUCCESS FACTORS? Sometimes it is helpful to narrow organization success to a few key indicators, making it easier to convey whether the organization is on track or falling short of goals.

16. DO WE HAVE WRITTEN FINANCIAL POLICIES AND PROCEDURES? Policies and procedures provide the internal machinery to provide consistent, reliable financial information. When procedures are not documented and followed, the resulting financial reporting can be confusing and chaotic.

17. HOW COULD FRAUD BE COMMITTED? Brainstorming related to fraud risks can help a nonprofit organization understand some of the key vulnerabilities inherent in the operation. By understanding these vulnerabilities, board members can take a larger role in their financial oversight responsibility by making sure adequate resources are secured to prevent fraud in the future.

18. HAVE WE ADDRESSED ALL AUDIT MANAGEMENT LETTER RECOMMENDATIONS? Auditors often prepare a letter of recommendations following the audit field work each year. By receiving this letter and following up on its implementation, board members will be engaged in the continuous improvement of the finance function, while conveying a message to the finance staff that the audit recommendations are important and should be addressed.



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19. WHAT ARE OUR MOST SIGNIFICANT SHORT-TERM CHALLENGES? This question should provide good feedback regarding where the finance staff believes the organization is headed. Hearing this straight from the person responsible for the organization’s finances should provide a more direct sense of whether the outlook is encouraging or frightening. Tip: Ask the finance staff to prepare a brief monthly highlight narrative summary of challenges. This may help focus the board on key agenda items for discussion and resolution

20. HOW LONG DOES IT TAKE, ON AVERAGE, TO PAY OUR VENDORS? This pragmatic, nuts and bolts question will help provide board members with a gauge of cash sensitivity and concern. If the organization is taking 90+ days to pay its bills, liquidity may be a concern worth discussing.

21. ARE WE DELINQUENT ON ANY FILINGS? Nonprofit organizations can have many filing requirements (IRS form 990, state license to solicit, payroll tax and wage reporting, etc). Delinquent or missed filings can cause significant penalties to accrue, while distracting the organization from its mission.

22. WHICH EXPENSES ARE RUNNING OVER BUDGET AND WHY? It is a good idea to understand the expense structure of an organization. By understanding those expense line items that are consistently over budget, you can build in a better planning process for future budgets. Also, the information gleaned by asking about unfavorable expense variances will likely drive conversation around the operational aspects of the nonprofit.



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23. WHAT TOOLS AND RESOURCES DO YOU NEED? Everyone has a wish list. For the finance department, the list may include improved accounting and general ledger software, staff and capacity to manage finances.

24. WHAT IS OUR PROCESS FOR BIDDING KEY SERVICES AND CONTRACTS? Good expense management requires periodic bidding of services and contracts. Many times, the process results in lower operating expenses. Often times, existing vendors and suppliers will come to the table with a better deal for the organization if they know that their work will be put out to bid.

25. WHAT IS OUR PLAN “B”? Things don’t always go as expected. Sometimes (hopefully temporarily) the worst case financial scenario becomes a reality. It’s always a good idea to know what actions need to take place to “weather the storm” during times of trouble.



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TONE AT THE TOP Using the management letter as an oversight tool

What is a management letter? Management letters are the written recommendations and concerns noted by auditors following fieldwork. Sometimes management letter items identify serious problems such as material weaknesses in internal controls and sometimes they simply address areas for future improvement such as upgrading general ledger software, etc. Simply put, management letter recommendations can be viewed as a post-audit "to do" list for the organization's accounting and finance function.

A management letter is one of the tangible “products” that boards receive following an audit

Why is it important to resolve management letter recommendations? Results and findings following the audit are often communicated to organization board members, banks, funders and grantors. The successful resolution of management letter recommendations indicates a willingness and ability to address key accounting, risk and internal control matters beyond the audit opinion letter. So, make sure to read and review all audit management letter recommendations. Ask the executive team to update you on progress going forward to assure recommendations are not forgotten. Of course, sometimes the costs of implementing auditor recommendations outweigh the costs. Many organizations perform a cost-benefit analysis of all recommendations, documenting the preferred course of action and communicating with both the board and auditors.



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TONE AT THE TOP Acknowledgements & More Information

I would like to thank the following individuals for their efforts in reviewing and evaluating this board oversight tool: Gerald Lindman, senior lecturer and Director, Center for Nonprofit Management, College of Management, Lawrence Technological University and Kellie Goines, CPA, Plante & Moran PLLC For more information, go to www.cfoshare.com or contact Robert Seestadt directly at [email protected]



Economy & Finance

Tone at the Top: 25 Questions to Ask at Board Meetings