Most people involved with nonprofit organizations are familiar with the concept of “conflicts of interest.” Generally, nonprofit board members should have a high standard of care and undivided loyalty to the nonprofits they serve. There should be no instances of self-dealing for themselves, people, or businesses related to them. For example, if a nonprofit is interested in purchasing a board members’ piece of property to expand their organization, they should be made aware of any costly problems beforehand. If the board member does not disclose this information, they will have violated their fiduciary duty by transferring their problems to the nonprofit.
Most board members generously donate their time, talent, and money with no expectation of return other than the satisfaction of being involved with a significant cause. However, nonprofits should be proactive by enforcing a conflict of interest policy, in the event a conflict of interest arises. Potential conflicts of interest could end up destroying both the public and donors’ trust in the organization. A sample conflict of interest policy can be found on the IRS website.
One of the greatest case studies on conflicts of interest is the Bishop Estate Trust controversy.
At the time of her death in 1884, Princess Pauahi Bishop was considered to be the most affluent landowner in Hawaii. In total, she owned approximately 10 % of the land in the state. Detailed in her will, Princess Bishop established a trust where all income from the land would be used to erect and maintain two schools on the Hawaiian Islands. The citizens were extremely enthusiastic for the Kamehameha Schools that would educate their children in the years to come. Since 1884, the Hawaii Supreme Court justices have appointed numerous groups of trustees to oversee the trust. The new board of trustees in combination with the increase in land and development values, which have driven up the trust’s worth to be billions, have created a high probability for conflicts and self-dealing to occur.
In August 1997, a Honolulu Star-Bulletin article outlined some of the conflicts of interests regarding the trust. These types of conflicts went beyond the board members’ relationship with the organization:
These conflicts were considered so corrupt that the IRS threatened to revoke the trusts’ tax exempt status. Ultimately, the allegations were resolved through private settlements and jail time. A full account of the case is detailed in the nonprofit management book, “Broken Trust: Greed, Mismanagement & Political Manipulation at America’s Largest Charitable Trust.”
Conflicts of interest are an important topic for many organizations. If you have any questions or would like to discuss any issues specific to your organization, please contact Aronson’s Nonprofit & Association Services Group at 301.231.6200.
A recent member survey conducted by Member Zone, revealed some interesting statistics. Of the 1,070 associations surveyed, 58% reported membership levels remained flat or declined. Here are the top five reasons members gave for not renewing a membership:
The most common renewal method was email, which 68% of Associations used. The top tactics for new member recruitment were word of mouth, events & meetings, email, trade shows & conferences, and social media. Perhaps individual phone calls to non-renewing members would have been better for retention efforts.
The top three enticing factors for new members were networking, education, and advocacy. For Associations, their main challenges revolved around recruiting and retaining members, attracting younger members, and effectively communicating their value proposition.
With the availability of information, prospective members may not believe they need an Association to serve as their industry information filter. Most successful organizations have excellent educational programs for their members that are industry-specific and not available elsewhere, they foster member-to-member relationships that are reinforced at meetings & events, and their legislative or advocacy programs are seen as effective.
Membership attraction and retention will remain important as businesses become more cost conscious of where they receive value.
Two of the most common revenue streams for private schools are tuition and contribution revenue. Unfortunately, tuition alone does not cover the cost for private schools to run their programs and maintain their campuses. Contributions are a great addition to tuition for private schools. However, do you know how to account for both revenue sources?
Tuition revenue is accounted for as an exchange transaction that is recognized ratably over the term of the school year net of financial aid. Any money received in advance of revenue recognition treatment being met, should be recorded as deferred revenue liability. See how to account for delinquent tuition payments here.
Contributions are recorded when received or pledged as unrestricted, temporarily restricted, or permanently restricted depending on donor restrictions. Some private schools have capital campaigns that raise funds to improve facilities, initiate new programs, or to build an endowment. Capital campaigns usually have explicit or implied restrictions; the stated objective of the capital campaign usually makes the donor’s restriction clear. Pledges must be carefully reviewed to determine if they are conditional or unconditional. Unconditional pledges should be recognized at fair value as revenue in the year the pledge is made. Conditional pledges are to be recognized as revenue when the conditions are substantially met.
The federal tax code allows taxpayers to deduct contributions or donations made to qualified private nonprofit schools that operate to educate students in the community or serve some other approved purpose. However, a donation made to a nonprofit private school may not qualify for the deduction if the school significantly engages in additional activities that do not relate to charitable, scientific, humanitarian, or religious causes.
A private school may offer a gift or other benefit, such as tuition discounts, in appreciation of a donor’s generosity. Schools that choose to offer discounts should advise donors that they must reduce the deductible value of their donation by the value of all gifts and benefits from the private nonprofit school. For example, providing a $500 gift certificate in appreciation of a $20,000 donation may seem minimal, but it still requires the donor to report a charitable deduction of $19,500 rather than $20,000.
The IRS has recently improved its audit selection process shifting from a subjective selection to a data-driven selection. Previously, subjective audit selection indicated that audits were driven by issue-specific determination. For example, following an IRS study on hospitals, more hospitals were selected to be audited compared to previous years. Similarly, following an IRS study on colleges and universities more audits of colleges and universities were performed.
The IRS has developed a data-driven approach that incorporates nearly 150 analytics based on nonprofit organizations’ Form 990 data in an effort to eliminate subjectivity. In doing so, the IRS intends to expand the number of organizations that could potentially be audited. If an organization “fails” too many analytical evaluations, it is more likely to be audited by the IRS. While no specific analytics have been published, industry experts anticipate the IRS to focus on the following sections of Form 990:
Although the IRS’s method of audit selection was updated, its budget has not increased for nonprofit organizations. Despite the budget stagnation, the new data-driven audit selection method has increased return change rates to over 90%, which represents a substantial increase in change rates compared to the 70% seen with subjective audit selection. Furthermore, there has been a 20 -day reduction in average audit completion since the implementation of data-driven audit selections – from 233 days in 2015,when subjective audit selections occurred to 213 days in 2016.
For more information on this new approach, click here.
On November 9, Aronson LLC, Arent Fox, and Morgan Stanley hosted an executive summit for exempt organizations that featured strategies for making and saving money, and tips on top governance issues. Missed the event? Here is a brief recap. The event kicked-off with keynotes delivered by former United Way CEO and Chair of the Alexandria Chamber of Commerce Joe Haggerty, and former US Senator and Congressman from North Dakota and current Senior Policy Advisor at Arent Fox Senator Byron Dorgan.
“Nonprofits should be providing the appropriate level of information to the public, this includes full disclosure, open conversations, innovate use of required reporting, and tying metrics to outcomes,” said Mr. Haggerty. “For example, instead of trying to hide salary info in an appendix, the United Way included its entire compensation plan in the 990 and added information on who they benchmark against and the overall philosophy of compensation.”
With a new administration and Congress set to take control in January, Senator Dorgan flagged several issues exempt organizations should be focused on. Including:
The first panel discussion featured Arent Fox Nonprofit Leader Richard Newman, Aronson LLC Nonprofit and Association Industry Services Group Partner Rob Eby, and Vice President and Financial Advisor for Morgan Stanley Matthew Teems. The group focused primarily on strategies for making and saving money. Those guidelines include:
Good governance was the central theme for the second panel, which included Mr. Teems, Aronson LLC Nonprofit and Association Industry Services Group Partner Gregory Plotts, Arent Fox Nonprofit Partner Sean Glynn, and Vice President of Commercial Insurance at Sahouri Insurance Allen Hudson. The group focused on investment committee responsibilities, audit committee responsibilities, and new accounting standards. Major takeaways include:
Additionally, three new Accounting Standards, which will take effect soon include: Financial Presentation for Exempt Organizations (Effective in 2018); Revenue Recognition (Effective in 2019); and Lease Accounting (Effective in 2020).