"Enterprise risk management is a process, effected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity and manage risk to be within its risk appetite, to provide reasonable assurance of the achievement of entity objectives."
Historically, nonprofit board members tended to view risk management as the need to ensure that the entity has sufficient insurance coverage. In this new age of board member accountability, risk management needs to fit the COSO definition.
The nonprofit board, through the efforts of its members, must understand the types of events that might push the organization into a condition where achievement of its mission, its financial health and its support from the community may be compromised.
What should the board consider as it looks at its future risks? Some important considerations:
* Does it understand the professional management team, its strengths and weaknesses and the succession mechanism in place for all of the key roles in the management hierarchy?
* Does it know the requirements for the financial security of the organization? Important information on key revenue sources and major donors must be part of the information evaluated in determining the organization's future financial security.
* Has it considered the impact on the entity's goodwill that will be made with each major decision involving changes in strategy?
* Have changes to current strategies been proposed by management? If so, the board must address the financial, operational and constituent ramifications.
* Is it time to elect new members to the board? If so, it must ascertain what skills and knowledge are required to keep the board relevant to the challenges the organization faces.
* Has it kept in mind that, at the end of the day, the board is responsible and accountable for the organization and its overall well-being?
No one expects every strategic and operational initiative to succeed. The board meeting is the venue where success and failure are considered. If it has not looked at the ramifications of a failed initiative, the board has not addressed its risk management responsibility. The board has the task of challenging new and revised strategies proposed by management or others.
In its risk analysis, the board needs to understand the metrics for measurement of mission fulfillment. The profit analysis of the commercial world does not exist for nonprofits; yet government, significant donors and others are critically interested in proof of effectiveness.
As the organization evolves and changes, the board has to track these changes into the effect on the mission. Development of a metric system that is responsive to the mission is critical for the board to understand various components of the risk equation. Should changes occur in the services provide, funding sources of the past may not desire to continue their participation.
Recent corporate failures indicate that those companies' boards were not up to the challenge of risk management. Those boards acquiesced to new strategic directions without challenging management's assumptions. In your nonprofit entity, new strategies and operational changes require the board's critical eye. The board must provide the oversight that its constituents expect, without micromanaging the professionals who make up the organization's management.
A risk management program does not seek to eliminate all of the risk in your organization but instead provides a framework for understanding and balancing risks that are inherent in operating a nonprofit organization.
Additionally, this program is the most effective method for aiding the organization's professional staff in dealing with those risks.
Mark Murovitz (email@example.com) is CEO of Tauber & Balser P.C. With more than 30 years of professional experience, he has provided audit services on initial public offerings, public companies and nonprofit entities. He has also performed financial investigations of both for profit and nonprofit matters. Murovitz has served a number of substantial nonprofit entities, including the Jewish Federation of Greater Atlanta, Theatre Gael and the Marcus Jewish Community Center of Atlanta. Reach him at (404) 814-4940 or www.tbcpa.com.
Recent failures of public companies and nonprofits have put both sets of board members in the spotlight. Before accepting a nonprofit board position, consider what is expected of you in terms of responsibility, legal obligations and accountability.
In Georgia, as in many states, the unpaid board member has protection for simple negligence. However, that protection does not cover behavior considered gross negligence or willful misconduct. If board members do not take their responsibility seriously, they could face negative public exposure and financial liability as a board member of a failed entity.
How does a nonprofit board member ensure the experience is meaningful to the individual and to the community?
The fundamental concept for the nonprofit board member is to make sure that the organization's resources are used as intended to fulfill its mission. This requires an understanding of the measurement mechanisms for financial and mission accomplishment. Frequently, the only tool utilized by the board member is the financial information produced by management.
Evaluating performance properly requires knowledge of the entity's operations, financial condition, the normal operating ratios and what financial resources must be available to ensure the organization will be able to continue to fulfill its mission in future years.
Further, the nonprofit's mission must be fully understood. Who is to be served and why, and what are the demands for the services in the community? From this baseline of information, the board member must understand how those needs are converted into goals and objectives that can be measured.
The professional management team of the nonprofit is the mechanism by which the goals and objectives are transformed into the desired results. The board member, in his or her oversight role, is responsible for governing, not for managing the organization. To govern, the board member must understand the qualifications of management, approve their compensation and evaluate the efficiency and effectiveness of their performance.
Board members must be satisfied that information used in the evaluation process is produced in an effective internal control environment. In addition, the information must be prepared in accordance with a set of rules that are clear and concise as to how transactions and mission statistics are to be recorded and reported. Preferably, for accounting reporting, generally accepted accounting principles promulgated by the Financial Accounting Standards Board will be used, as they are comprehensive, available and used by most nonprofit organizations for external reporting.
The board member should also understand what good financial health means for the nonprofit. One useful tool is comparable financial information for similar organizations. Comparable information is sometimes difficult to obtain; however, with some hard work, it can be done. For example, by law, most nonprofit organizations must provide their federal reporting forms on demand unless they have arranged to have them available through the Internet.
Using the site www.guidestar.org, a board member or management, under a request from the board, can obtain copies of the federal forms for similar organizations. Also, many nonprofit organizations are members of national or state associations.
Such associations may provide peer group information, which can be used to create benchmarks. And in Georgia, the secretary of state provides useful fund-raising statistics online.
Analysis of peer group information means information from a group that is similar in mission and size is developed, studied and compared. Operating and financial ratios of interest can be developed, and trends over a reasonable time period can be examined. Once information is produced, management can respond to questions concerning deviations or anomalies in any of the items chosen for evaluation.
As a board member or a prospective board member, make sure you understand the protections offered by state law and the nonprofit you are considering. You should know if the nonprofit carries director and officer liability insurance and if it provides indemnity for actions taken as a board member.
We Americans are unique in our volunteering efforts. Our communities have been well served over the years by our nonprofit organizations.
The future of our nonprofit mechanisms depends upon lay board members educating themselves and fulfilling their oversight responsibilities with dedication and enthusiasm.
Mark Murovitz (firstname.lastname@example.org) is CEO of Tauber & Balser P.C. With more than 30 years of professional experience, he has advised on initial public offerings, business and asset valuations and financial investigations. He has served a number of substantial nonprofit clients in the community including Emory University, Theatre Gael, Atlanta Jewish Federation and the Marcus Jewish Community Center. Reach him at (404) 814-4940 or www.tbcpa.com