Christian Leadership Alliance
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Inadequate Governance and Financial Oversight
Experienced leaders understand that boards set policy and maintain accountability controls, while the CEO executes those policies in running the operation. The buck appears to stop there. However, history demonstrates that when things go wrong, more often than not the cause can be traced to failure of financial accountability.
When the Evangelical Council for Financially Accountability (ECFA) was founded, "financial" was in its title—not because boards and CEOs weren't seen as the top of the organization—but because financial management is the fulcrum that keeps an organization in balance. Proper financial management requires good governance practices to maintain the proper check and balance between the board and staff in perpetuating a level of accountability.
When a nonprofit organization experiences a significant failure, the following governance and financial management controls are often lacking or abused:
- Expense reporting, including inadequate documentation, approval, lack of business purpose, and timing
- Credit card abuse, including lack of business purpose
- Inadequate separation of duties
- Financial reporting not timely or accurate
- Lack of board oversight over the audit process
- Payables never tested
- Donor-restricted contributions not monitored
- Lax oversight of bank accounts
- Lack of an investment policy
- Lax attitudes towards the board's responsibilities
- Improper compensation packages, including inadequate documentation of executive compensation
In the last three decades, there have been 12 notable examples of nonprofit failure. When asked to identify the ten examples, the names of PTL, the United Way, and the Red Cross might come to mind, and perhaps New Era. But the details of any of these 12 examples are often forgotten in the fog of time. The following summary capsulizes the key aspects of these nonprofit failures:
1. Praise the Lord Ministries (PTL). There was plenty of blame to go around with PTL. Due to a board that was AWOL and a leadership team that held a false belief that it was invincible, the problems only surfaced when the money ran out. [1]
Warning signs in neon lights were missed because fundamental financial management and controls were lacking. Bills were paid into a blind executive fund with no accountability. Income designated for construction of a hotel was ignored in favor of huge bonuses for the leaders. Totally inadequate financial controls and reporting masked the huge losses and impending disaster.
The audit firm also failed to catch and warn of the collapse that was coming. Its culpability in court findings and the resulting public disclosure eventually ruined the firm.
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