Policies and the Impact on Financial Management

Dan Busby, CPA 
This article provided by the Engstrom Institute

Churches and other nonprofit organizations are very familiar with policies. They provide sound guidance for our day-to-day operations. And, the larger the organization, the more policies there seems to be.

Collections of policies grow up to be policy manuals. Boards adopt policies (Good Governance for Nonprofits Bob Andringa and Fredric Laughlin, published by BoardSource is the premier book on this topic); policies are often adopted at the operational level; and sometimes CEO's issue policies.

Policies come in many flavors—human resource, accounting, facilities and many more. The greater the number of policies, the more likely one or more persons will be assigned the responsibilities of enforcing and interpreting the policies, e.g. a Director of Institutional Policies.

Policies notoriously collect dust. It is likely some of them are out-of-date and/or not being observed. This highlights the importance of an annual review of policies of all types (board and staff) to determine relevancy.

Organizational policies are a fundamental basis for well-run churches or parachurch organizations. My organization, ECFA, has issued best practices—many of these best practices related to policies. We even provide sample policies. We believe in policies.

But should a church or parachurch organization be required to adopt a particular policy or a certain set of policies? I am convinced that policies (board and organizational policies) do not come in a "one-size-fits-all" box!

Ministries should have the flexibility to decide whether they need a particular policy or set of policies. As an organization grows and its needs become more complex, polices should be adjusted to fit the specific circumstances.

For example, organizations should avoid conflicts of interest—on this there is common agreement. But is a policy required to avoid conflicts of interest? No, but a policy is an excellent way to heighten awareness of this topic. Is a certain conflict of interest policy necessary? No, there are various sound policies on this topic—some more or less complex.

Another example—one board self-evaluation policy might stipulate an annual review using an outside group. Another policy might involve very basic evaluation techniques a board could complete on its own. Some boards use informal techniques to evaluate their work without a formal policy.

Policies should fit the charity. This is true of board policies, human resource policies, and financial management policies. Policies should reflect the culture of a particular organization. Policies should work within the confines of the entity.

Recently, the Internal Revenue Service (IRS) has aggressively moved into the nonprofit policy scene. The IRS has included policy-related questions on the Form 1023 Application for Recognition of Exemption (for the last few years) and the Form 990 Return of Organization Exempt from Income Tax (2008 version). Does the IRS require certain policies? Technically, no, but practically, it is another matter.

If a church or other nonprofit organization applying for tax-exempt status does not have certain key policies (as defined by the IRS), they will be pressed, to adopt the policies. For organizations required to file the 2008 version of Form 990 in 2009, there are a number of questions about specific policies (conflict of interest, whistleblower, document retention and destruction, compensation review and approval, evaluation of joint venture agreements, for example).

What is the importance of a few questions about policies? Responses to the new Form 990 will be posted on the Internet for evaluation by the public and the media. A "feeding frenzy" is bound to start in 2009. Significant attention will be based on the responses to some of these "policy" questions.

Many nonprofit policy experts will appear in the great Internet wonderland. They will express their opinions on policy deficiencies of certain organizations and draw conclusions, going far beyond the presence or absence of policies. This will be the new world of nonprofits!

Even a group formed by the IRS, the Advisory Committee on Tax-Exempt and Government Entities (ACT), expressed concern about the IRS's increasing interest in charities' governance policies.

While agreeing that well-governed charities are more likely to comply with the tax laws and pursue charitable goals, ACT warned that if the IRS asks about specific governance practices, charities may feel pressured to adopt policies they otherwise would not consider. It also would place undue burdens on charities in terms of time, resources, forms, and the ability to recruit board members.

My opinion? Good governance is more than policies. It is more about shared governance between a board and organizational leaders. It is about accountability. Churches and other nonprofit organizations should have the responsibility to determine which policies are appropriate in a particular setting. With this freedom, financial managers and other nonprofit leaders can focus on the particular ministry to which each organization is called!

Dan Busby, CPA, is Acting President of the Evangelical Council for Financial Accountability