by John Cohen
Many CEO’s control virtually all contact between the organization and the (independent) Board of Directors. This practice may reflect the diligence of the CEO but also creates potentially serious risks to the organization and to the Board.
Insuring that the Board receives accurate information is within the CEO’s job description but also provides the CEO with the opportunity to hide “bad news.” In the worst case, the CEO may be abusing his/her power within the organization while preventing the Board from getting even a whiff of brewing problems, including waste, fraud, and noncompliance with legal regulations and the organization’s policies.
Virtually every scandal involving a CEO exhibits a profile in which employees are afraid for their jobs, Board members are friends of the CEO, and the auditors work under the unstated threat of losing a good client. Newspaper headlines are full of such examples, from local nonprofits to the infamous Enrons and Tyco’s of recent memory.
No one wants to make themselves into a pariah on a Board of Directors, especially a volunteer nonprofit board. However, here are some standard “best practices” measures which are both inoffensive and very effective.
1. The Board (not the CEO) should recruit someone with strong accounting credentials (e.g., an experienced CPA or CFO) to become a Board member. He/she can suggest more thorough or more understandable financial statement information, can ask “hard” questions, and will reduce dependence on the CEO for explanations of data.
2. The Board should form an Audit Committee to which the CPA audit firm reports directly and communicates outside the presence of the CEO. The Audit Committee is not to be confused with a Finance Committee, which generally expends most of its effort in the budget effort and analysis of interim financial results.
3. Arrange to have a short presentation by different managers at each Board meeting. These presentations make Board members’ decision-making more informative and give the members the opportunity to ask questions which may result in some unexpected “red flag” reactions.
4. Consider a whistle-blower telephone line. This is extremely effective and not costly. Check with your legal counsel who can recommend a written policy and refer you to a service.
NPA Consultants are interim/part-time CFO/Controllers and Process Improvement Consultants, specializing in Governance, Policies, Procedures, Internal Controls, and Financial Reporting. We help accounting departments run “better, faster, cheaper,” and Boards of Directors/senior managements insure that they are performing their fiduciary duties at the highest possible level. We are happy to answer any questions. Contact us at info@NPAccountants.org or 617 694 4600.