One of the most important obligations a nonprofit board has under its duty of care is to ensure that the organization is compliant with the many rules that are imposed by Federal, State and sometimes municipal regulations. One of those rules is to ensure that payroll taxes have been paid on-time as was not done and noted in this blog a couple of weeks ago.
Well, the situation with this Lawrence, Massachusetts nonprofit food bank has not gotten better but the situation has stimulated conversation among the rest of the sector and that conversation is somewhat reflected in the following Lawrence Journal-World article. Good lessons on the fiduciary duty of care.
Nonprofit boards require more than activism and raising money; governance is major component
Agencies re-examine practices in wake of financial disorder at Just Food
By Karen Dillon — Lawrence Journal-World - August 27, 2015
Lawrence’s nonprofit charity community is continuing to adjust two weeks after the executive director of the city’s largest food bank resigned amid revelations that he had not paid $61,000 in federal and state payroll taxes — and allegations that he misled the board of directors on accounting practices.
The executive director of Just Food, Jeremy Farmer, 32, also resigned as Lawrence’s mayor two days after he stepped down at the food bank by “mutual agreement” with the board of directors.
Following a review of the agency’s financial records, the Just Food board released a statement Aug. 21 claiming that Farmer had intentionally misled board members about a variety of financial matters, including dismissing the agency’s outside accountant without the board’s knowledge.
Situations like this don’t often happen, but when they do, they can send shivers through the hundreds of volunteers who serve as board members in Douglas County, said Erika Dvorske, executive director of the United Way of Douglas County.
And, on the positive side, they can also serve to strengthen financial controls, she said.
Dvorske said one agency she worked with recently told her it had adopted a policy that required the agency’s income tax return to be kept at the front desk for anyone from the public to review. The new policy came about because of the Just Food financial mess.
“I think this has produced a fair amount of conversation,” Dvorske said. “The people doing this kind of work want to do all the right things. Folks are asking very good questions.”
People need to understand that risks and responsibilities accompany taking a position on a board that has oversight of a nonprofit agency, said Rick Cohen, a spokesman for the National Association of Nonprofits.
“It is a challenge for many nonprofits who have many well-meaning board members who want to do what they can to support a cause, but they may not be as well-versed in governance,” Cohen said. “In reviewing financials and annual filings, they need to be in a position to hold an executive director accountable.”
The nonprofits association has a webpage that discusses the responsibilities of a “governing” board. In addition several states, including Kansas, have guidelines for board members of charitable organizations.
All the guidelines are similar and recommend that the board should be made up of members with diverse viewpoints and career backgrounds, including lawyers and accountants. Those members can be called upon to help with oversight and to raise money.
For example, in the case of Just Food, its treasurer is Maley Wilkins, who is executive vice president of retail banking at Peoples Bank. All members, however, even if they don’t have a financial background, should have access to the agency’s financial and operating records.
One of the board’s most important responsibilities is hiring a CEO who runs the day-to-day operations of the agency and setting that person’s salary and compensation. Board members should be actively engaged in that process, the guidelines said.
Guidelines from the Massachusetts attorney general’s office, as a clear example, say that each member should know what the salaries of the CEO and senior managers are and how much they receive in other benefits such as an allotment for use of an automobile.
The board also is required to pay close attention to financial matters. Those responsibilities according to the states’ nonprofit board guidelines include:
• Developing a budget. The board should be involved early on developing an annual budget. Board members should review and approve it.
• Reviewing monthly financial reports. The board should receive a monthly accounting of the budget and income and expense statements. Board members should take an active role at meetings to review the records and question the information they contain.
• Reviewing audits. Each board member should review all audits even if there is a standing audit committee.
• Ensuring all financial filings are up to date. The board needs to ensure through periodic confirmation that all required filings such as income tax returns and employee withholding taxes are done. The IRS requires that the board review the income tax form 990 and have it available for the public to review.
In the case of Just Food, Farmer signed the 2013 and 2014 990 forms, but the agency’s accountant was noticeably absent in the signature box. It is unclear what level of review those forms received from the Just Food board, although the forms do state the board is required to review them prior to the returns being filed with the IRS.
The board has explained that Farmer misled them about the accountant’s status but has not addressed the requirement that the board review Form 990.
For the 2014 tax form, Farmer submitted it to the United Way so that Just Food would be eligible for funding, but he never submitted it to the IRS.
It’s still unclear how long Farmer had failed to file and pay withholding taxes.
If a person is asked to serve on a governing board, he or she needs to ask if it maintains liability insurance for directors and officers, Dvorske said. The insurance, which the Just Food board had, provides some protection when a financial issue arises like the one that the Just Food board faced, Dvorske said.
“The chance that this would happen is really small,” she said. “The majority of boards are able to do the work they need to do and address the mission of the organization. I continuously hear from board members when they are involved in the board work that they get a lot out of it, they learn a lot and they feel like they are really contributing and helping strengthen the community.”
Kristi Henderson, president of the Just Food board, said the board’s priority now is to address “the current tax liability and maintain crucial services to our clients. We also recognize this is a learning opportunity. We will use information from our auditor, accountant and counsel to develop updated controls.”
Henderson said the board, like others, relied on paid staff to provide accurate information.
“Board members are unpaid volunteers, and most people have a finite amount of time available to devote to serving their community,” she said.
Through all the upheaval, none of the 12 board members at Just Food had resigned their position, Henderson said.
“The 12 members of our board are committed to working through this transition and have collectively invested many hours over the past few weeks while we’ve addressed recent events at Just Food,” she said.
Farmer did not return calls for this story. He has not spoken publicly since resigning as mayor on Aug. 12.
Gary Rexroad, a United Way board member and past chairman who had been a friend of Farmer’s, said he had not talked to Farmer since the allegations came to light.
Rexroad said he had moved on from that friendship and now wanted to make sure that the families who depend on Just Food will continue to receive food. He also raised concerns about the impact on the community.
“Our community needs to come together,” he said. “Everybody is reeling a little bit. This has been a really, really hard thing for everybody.”