Virtual Work Approach to Mechanical Modeling

Notice to Readers iii

About the Authors v

Preface vii

Acknowledgments ix

1 Increased Complexity and Mounting Challenges: Time to Prepare 1

Call to Action 6

Conclusion 6

2 Roles of the Board and Management 9

Governance in the 21st Century 10

Purpose of the Governing Board 11

Board Committees 12

Legal Responsibilities of the Board 13

Lesson Learned 13

Lesson Learned 13

Lesson Learned 14

IRS Form 990 and Governance 14

Frameworks for Good Governance 15

Panel on the Nonprofit Sector Framework-Good Governance Model 16

Legal Compliance and Public Disclosure 17

Effective Governance 20

Conclusion 30

Appendix A-Comparison of Key Objectives of the Board of Directors With the Good Governance Framework and Questions From IRS Form 990 32

Appendix B-Example Dashboard for Board Evaluation 35

Appendix C-Sample Board Self-Assessment Document 37

3 Legal and Ethical Imperatives for Leadership 39

Legal Accountability 40

Ethical Accountability 41

Who is Accountable for Accountability? 43

How to Instill Ethical and Legal Accountability 44

Honest Communications 44

Strong Relationships 44

Internal Controls 45

Clear Expectations 45

Skilled Boards 45

Involved and Informed Boards 45

Financial, Document, and Ethics Audits 45

Compliance Officers 46

Resolving Dilemmas 46

What About WholeHealth? 48

Conclusion 49

4 When Management and the Governing Board Disagree 51

The Head Game 52

Communication 53

Constructive Norms 55

Negotiation 57

Assisted Resolution 59

Conclusion 60

5 Understanding the Financial Statements of Nonprofit Organizations 61

Characteristics of Nonprofits 62

Responsibility for Financial Information 62

Basis of Presentation for Financial Information 63

Cash Basis of Accounting Versus Accrual Basis 63

Basic Financial Statements 64

Footnotes to the Financial Statements 65

Fund Accounting 66

Assets 70

Liquidity 70

Cash and Cash Equivalents 71

Revenue, Receivables, and Deferred Revenue 72

In-Kind Contributions 75

Long Term Contributions 76

Conditional Promises to Give 77

Endowments 78

Split Interest Agreements 79

Agency Transactions 81

Nonprofit Serves as a Conduit for Cash or Noncash Donations 81

Nonprofit Solicits Funds for Another Nonprofit Organization (Unrelated) 82

Nonprofit Holds Funds for Another Nonprofit Organization (Unrelated) 82

Nonprofit Enters Into Transactions With Related Foundations 83

Inventories 83

Prepaid Expenses and Investments 84

Alternative Investments 84

Property and Equipment 85

Liabilities 85

Accounts Payable and Accrued Expenses 85

Mortgages and Notes Payable 86

Net Assets 86

Revenues and Expenses 86

Conclusion 87

6 Risk Management 89

Some Risks Can Be Mitigated With Insurance 89

Cyber Risk-A Growing Threat 90

Risk in a Complex World 90

A Nonprofit's Most Important Resource 91

Risk Management Approach 93

Enterprise Risk Management 93

ERM Component One 94

ERM Component Two 94

ERM Component Three 94

ERM Component Four 95

ERM Component Five 96

ERM Component Six 96

ERM Component Seven 99

Example Application of a Risk Management System to a Nonprofit Organization 99

ERM in Smaller Nonprofit Organizations 102

Risk Management Committee 103

Crisis Management 104

Revisiting Uncertainty 105

Conclusion 105

Appendix A-Risk Management Checklist 107

7 Internal Controls: What Every Executive and Board Member Needs to Know 113

Characteristics of Nonprofits 113

Internal Control Defined 114

COSO Framework Updated for Changing Times 115

Distinguishing Error From Fraud 116

Controls for Smaller Organizations 118

Elements of Internal Control 119

Control Activities 121

Designing a System of Internal Control 123

Entity Controls 123

Control Activities 127

Antifraud Programs and Controls 131

Misappropriation of Assets 131

Fraudulent Financial Reporting 132

Revenue Recognition and Management Override 132

Control Environment 133

Fraud Risk Assessment 133

Information and Communication 133

Monitoring 134

Billing Schemes, Check Tampering, and Expense Fraud 136

Use of Analytical Techniques to Identify Unusual Disbursement Transactions for Investigation 140

Skimming and Larceny 141

Payroll Fraud 143

Controls Over Noncash Items 146

When Processing Is Outsourced 146

Cybersecurity and Not-for-Profits 147

Internal Controls Evolve 148

Conclusion 149

Appendix A-2013 COSO Framework 17 Principles-Summary 150

8 Focus on Tax-Exempt Status 155

Nonprofit Organizations and Tax-Exempt Status 156

IRS Filings 157

Differences Between Nonprofit and Commercial Organizations 158

Recognition of Tax-Exempt Status 162

Lobbying 164

Public Charity or Private Foundation 166

Public Support Test for Charitable Organizations 167

Test 1 (509(a)(1))-Compute the Public Support Percentage 168

Test 2 (509(a)(2))-Compute the Public Support Percentage 169

Supporting Organizations 170

Charitable Contributions 172

Filing Form 990 175

Unrelated Business Income 177

IRS Audits 179

Conclusion 180

Appendix A-Guide for the Board's Review of Form 990 181

Appendix B-Important Filings for Tax-Exempt Organizations 185

Appendix C-Governance Policies and Procedures 188

9 The Courage to Lead 189

Moral Courage 189

Barriers to Ethical Action 191

Strategies for Ethical Action 194

Have a Clear Compass 194

Know Your Objective 195

Seek Advisers and Allies 195

Walk the Walk 196

Understand Change Strategies 196

Practice Considerate Communication 197

Conclusion 197

10 Change Management 199

Understanding Change 200

Be Clear About What You Want 202

Assess Before You Act 203

Create Awareness and Urgency 204

Create a Powerful Coalition 205

Communicate 207

Address Obstacles and Blockers 208

Create Short TermWins 210

Give People the Tools to Succeed 210

Solidify Changes 211

Suggestions for Sonja 212

Be Clear About What You Want 212

Assess Before You Act 212

Create Awareness and Urgency 213

Create a Powerful Coalition 214

Address Obstacles 214

Communicate 215

Create Short Term Wins 215

Give People the Tools to Succeed 215

Solidify Changes 215

Conclusion 215

11 Integration for Action 217

Case One: AWoman Scorned 217

Prevent 218

Address 219

Improve 220

Case Two: The Indeterminate Sentence 221

Prevent 222

Address 225

Improve 225

Case Three: Your Turn 226

Sustained Success 227

Conclusion 227

Glossary 229

Bibliography 235

Suggested Reading 239