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Hello, Cleveland!

Our recent article on religious denominations within the Jewish community was featured in yesterday’s edition of the Cleveland Jewish Times.

Read the article HERE.


Transparency and Financial Oversight

Reposted from eJewish Philanthropy – January 24, 2012

“We think that the foundation should have glass pockets.”
Russell Leffingwell, Chair, Carnegie Corporation, 1952

Effective oversight of financial systems in nonprofit organizations is key to their proper and effective functioning. This philosophy, however fundamental, has not always been universal practice nor have donors always expressed more determined expectations about the transparency of organizations they support.

In today’s marketplace, nonprofits that watch over finances and share financial, programmatic and other information with their constituents build stakeholder confidence and are thus far better suited to fulfill their missions, deliver effective services and adequately address donor concerns. Nonprofit finances not only include fiduciary elements but also address reporting of capital, personnel and programmatic expenditures.

But no organization is immune from the high standards of financial transparency. Within the last few months, two rabbis were accused of mishandling precious donor dollars for organizations they headed, and the headlines in various media and across the internet were, well, ugly.

Therefore, in today’s fast-paced and accessible environment, the landscape is changing and standards are rising. In fact, while we eschew “gotcha” scenarios, we do encourage every one of our client organizations to establish a financial oversight committee – apart from the agency’s treasurer and CFO – for major campaign efforts and ongoing operations, especially to assure donors at all levels of proper procedures and practices!

At the heart of increased transparency and accountability is the widespread belief that, in return for public support, nonprofits have a special responsibility to the public: a responsibility to earn and maintain trust instilled by donors to properly utilize funding to fulfill their stated mission. Today, no nonprofit leader, professional or volunteer, could be considered exempt from scrutiny; and we suggest that nonprofits today must be diligent in setting policies and adhering to best practices to assure donors that they are in force and the guide organizational decision making at all times.

Media reports abound with the financial shenanigans undertaken by some nonprofit staffs and boards. And we know that the Jewish community is not immune from various recent horror stories that validate the importance of nonprofits establishing formal policies to promote transparency. In this context we are often stunned to hear that some people claim that they do not want to receive information even when agencies produce extensive annual reports or other detailed materials.

Here is a review of only a few recent examples of alleged bad practices:

Excessive spending on luxury travel, jewels and clothing appear to be the habits of a New York-based educational and charitable organization in the Orthodox community.

A Birmingham, Alabama, nonprofit that provides computers to needy kids was treated as a “personal piggy bank” by the founding board member who traveled, gambled and lavishly spent charity money for years. During this time, this nonprofit did not even file the requisite IRS nonprofit forms.

Embezzlement of nearly $1 million by an outside accountant was treated as an internal matter by the CEO and other high level staff of a nationally known community organizing operation. Neither the Board nor law enforcement was initially notified as the CEO sought to cover up the misuse of funds. The outside accountant also happened to be the CEO’s brother so the drama continued unabated.

A Chicago-area nonprofit providing affordable housing dedicated nearly $700,000 to the director’s salary, three times as much what other nonprofit housing leaders in the region made.

Clearly, no sector, whether Jewish or not, is immune from scandal. So what should nonprofits do?

  1. Damage to the public perception of the organization and the loss of the public trust is often irreversible, rendering an organization incapable of functioning. Nonprofits rely on the trust and good will generated through fulfilling compelling missions that advance the public good to cultivate and sustain support from donors and clients. Contributors are less likely to support an organization with a history of poor financial oversight or worse.
  2. Today’s donors demand greater transparency; they want a financially accountable and open organization. The legacy of the rubble of Enron and financial deals crafted in “quiet rooms,” at the outset of the latest economic recession is a societal push for accountability and transparency. We hold our schools accountable and we expect our government to be open in how it operates and more accountable for its actions. Now, donors view their charitable contributions less as a gift and more like a strategic investment. Therefore, they demand more honest information about how their investment is utilized. It will not take much for sophisticated donors to be turned off by an information vacuum or the perception that the business side of the organization is being handled improperly. The more you share, the more your stakeholders will understand, and the more likely they are to support you.
  3. Rules governing charitable organizations, namely from the IRS, require honesty and compliance. IRS Form 990 requires annual reporting on a nonprofit’s mission, governance, programs and finances as well as the organizational compliance with relevant state laws. In addition to the Federal reporting, most individual states require annual reporting of finances and governance. Oversight by local government also ensures tighter controls over nonprofit organizations. After a local charity providing low-income housing and facing mounting financial problems received hundreds of thousands of dollars in grant funding, the city of Glendale, California, approved the requirement for two years of financial statements and audit reports for any nonprofit organization competing for social service funding from the city.
  4. Transparency is the basic foundation for collaboration. Openness fosters collaboration with staff, donors and volunteers and the efficient use of resources to fulfill the organization’s mission and increase giving.

Transparency is not easy. In the hectic world of nonprofit management, transparency and financial oversight are often relegated to non-urgent status as staffs and boards may view these as “chores” as not advancing the mission. But as the notable examples consistently show, time well spent on creating and implementing financial oversight systems and a culture of openness are significantly beneficial in the long run. To maintain relevance and stability (or growth), nonprofits should act now and consistently to be more open, compliant and diligent. Below are some recommended steps for openness:

  • Nonprofit boards should institute formal policies and procedures to ensure the prudent and responsible management of all financial documents (e.g. budgets, audits, expense reports, compensation, petty cash and invoices). Board members and relevant staff should review, approve and track budget and organizational financials on a monthly basis.
  • Accurate and complete financial records should be maintained at all times. Nonprofit organizations should undergo annual audits or reviews by an independent and qualified financial expert.
  • Clear policies for reimbursement of documented business and travel expenses should be created.
  • Board members should question patterns of spending that seem at odds with stated organizational policies and objectives.
  • Boards should create or enhance their audit or finance committees and recruit directors or committee members with relevant professional experience.
  • Charitable organizations should use the Internet and other electronic media (e.g. blogs, Twitter, Facebook, website, Flickr, YouTube, Linked In, e-newsletter) to disclose information such as an annual reports, names of board members, as well as mission and vision statements.

Clearly, the nonprofit sector has come under increased scrutiny by the government and private contributors. Establishing consistent and transparent financial oversight systems will go a long way in maintaining the public trust and cultivating financial support.

Depending on Government Funding: Impacting Your Nonprofit Organization?

Visitors to the EHL Consulting’s web site in November spoke out about depending on government dollars.  What do we recommend?

Certain types of nonprofit organizations believe that they cannot survive on fees and charitable support alone. Albeit they may be the financial lifeline but there are other resources to consider.  Although no two organizations are exactly alike, many depend on different types of government funding to help finance an organization’s programs. Even during difficult financial times, we note that over $500 billion in federal grants are made available annually. Receiving consideration requires basic research and then active filing.

There are advantages and hurdles associated with seeking and receiving federal, state, or local government funding. The obvious advantage is supplemental funding for needed causes. Often government funds are perpetual and agencies become dependent on these monies. The disadvantage of the funding can often be various political motivations. Both Democrats and Republicans have social causes that they favor or not and these motivations can sometimes affect federally funded programs. This may have been one of the factors that prompted almost one-third of our web site survey respondents in November to acknowledge a decrease in governmental funding in 2011.

Another issue is timing. Governmental allocations are not necessarily synchronized with the fiscal calendars of every organization. Funding cycles can vary from year-to-year, too. For example, a nonprofit organization could be in the need for the funding of a special screening or a periodic program; thus questions arise regarding whether the allocations should happen each year or in other timeframes. Much depends on the accounting controls set forth by the organization as well as the proposals submitted to request funding.

Government favors nonprofits that serve social and health-related services but arts and cultural institutions are also likely to qualify, too. There are new barriers with some federal funding. Just two years ago, the government reduced funding to nonprofits that have CEOS that earn more than $500,000. The thought process is that government dollars are being funneled into programs as opposed to administrative costs.

Our advice in the times of the “new normal” is to  position your nonprofit to survive on charitable support, fees and reputable programs because government dollars will become even more unlikely, more difficult to secure, and be paired with restrictions that may be almost crippling.  If fortunate enough to procure a government grant, try to use it as an enhancement for organization purposes that will not be in jeopardy once government dollars vanish


Taking a Fresh Look at Endowment: Financial Security, Ethical Dilemmas, & Investment Strategies

Every vibrant nonprofit today requires a strong endowment as part of its financial program and the best and most well-run agencies accepted this mandate many years ago. Lessons from the Great Recession remind us, too, that endowments are a critical venue for institutional funding.  Yet fresh perspectives about endowments are important today and are reshaping the financial picture for many nonprofits.

Webster’s defines an endowment as “the part of an institution’s income derived from donations.” With this basic statement in hand, I am hearing that some nonprofit organizations still confuse “endowment” with “planned giving” or a “free-spending account” . . . or even other incorrect or misleading terms. This prompts me to wonder aloud if nonprofit leaders truly understand the critical importance of having adequate endowments, what they are doing to build this important income stream for the long term, and what they see as their responsibilities to protect the corpus of the endowments.

Nonprofit volunteers and professional leaders need to keep evaluating the endowment programs that they create and depend upon. Recognize that donors have made endowment gifts with the expectation that funds will be managed well (conservatively), and funneled to oftentimes specific channels for restricted purposes and will be available for years to come. Every endowment gift represents an investment in the future of a nonprofit

As a consultant to nonprofits of all types and sizes for many decades, I receive questions constantly about what represents adequate endowments and what these dollars can be used for. Best practices today dictate that a nonprofit’s endowments should exceed no less than five times its operating budget. One of the troubling factors today is that too many nonprofits are not considering this ratio, are looking only at their day-to-day needs, and are not necessarily being creative in the approaches they are taking in establishing and encouraging endowment gifts.

Because of financial pressures, some nonprofit leaders have even dipped into their organization’s endowment when times seem economically dire and have not replenished the corpus, thereby perpetuating “the slippery slope” of economic difficulties. This is not only bad practice but it also often violates instructions set forth by generous donors.

There are many reasons to keep healthy balances in the endowment investment portfolio. One of the primary reasons is because of a likely scenario that I discussed for “Taking the Long View” in the September edition of Advancing Philanthropy. The author, Paul Lagasse, asked me if there was a lesson to be learned about the Great Recession as it pertains to endowment funds. My view steadfastly remains that we need to be prepared for the next downturn in the economy. The best way to do that responsibly is safeguarding our endowments. Interpret this as protecting the corpus of the endowment while concurrently attracting more donor support for restricted and unrestricted purposes.

In the winter 2010 issue of The Stanford Innovation Review, authors
Burton A. Weisbrod and Evelyn D. Asch make another compelling case that endowments are more than simply a rainy day account. In many cases, it is a benchmark for bragging and a measurability of viability. It is a way for consumers (aka donors) to understand the impact of an organization. Savvy donors use it as a guide to determine an organization’s level of sophistication as well as their wealth management expertise. From an organizational perspective, it is a way to showcase a respectable endowment as “qualified” and capable for cultivating additional support.

Besides the ethical dilemmas associated with dipping into the assets of an endowment, acknowledge, too, the overarching federal law that prohibits such practices from occurring. The Uniform Prudent Management of Institutional Funds Act of 2010 (UPMIFA) provides guidance on investment decisions and endowment expenditures for nonprofit organizations.  Almost every US state except Florida, Mississippi and Pennsylvania also adopted these recommendations about good investment behaviors. The idea of this act is to responsibly dictate guidelines for nonprofits on what levels of withdrawls from endowments are permitted. In other words, endowment funds decreasing in value probably are not eligible for withdrawls. Any deviation from these guidelines would be deemed irresponsible and possibly unlawful.

Therefore, as increasing numbers of nonprofits do adopt best practices about establishing and fostering endowment programs, I recommend that organizations consider four essential points to secure both the trust of donors and treat their funds with respect:

A.   Continually review investment policies. In doing this, I recommend that every nonprofit Board regularly assess investment allocations, evaluate the work of management and investment services, and clarify and redefine endowment objectives. Professionals who are specialists in nonprofit investment strategies should be called upon.

B.   Endowment programs should be building for 20 or more years . . . not just for today! Contributions to endowments should not be looked at as band-aids on the finances of any nonprofit. Therefore, donors may make either (or both) testamentary gifts as well as current gifts to fund restricted or unrestricted purposes.

C.   Provide an annual report to stakeholders. This important document can highlight accomplishments and relatable statistics to give donors a sense of how their gifts are being appropriated and managed. Perhaps their money is supporting a specific program or professional position: donors expect to see if their dollars are justified by the end result.  In the case of unrestricted gifts, donors would like to know that their contributions are paving the way for a financially sustainable future for the organization they love.

D.   Seek ongoing endowment initiatives. Make sure there is a vision for what endowment gifts can support. Donors like to see tangible results being accomplished. They may also like to have some control of where their money is going. Invite donors at all levels to truly become investors in the future of the nonprofit by being committed to endowment strength just as much as addressing every day financial needs.