NP Times / Executive Session: Facing The Music

Edited By Paul Clolery

The 60 Minutes interview is so engrained in the American psyche that it's spoofed by comedians and is instantly recognized by the audience. But, whether the film crew is from 60 Minutes or from KRBC-TV in Abilene, if the camera is pointed at you, you'll feel just like Martin Short looked during those old Saturday Night Live routines.

The scrutiny nonprofits face these days is unprecedented. The topic, almost assuredly, will be about the organization's finances. The issue of whom is best to face that camera was the topic of an Executive Session discussion during the inaugural Not-For-Profit Financial Executive Forum in San Francisco, which was hosted by the American Institute Of Certified Public Accountants.

The participants included: Dr. John E. Courtney, CFAO, chief financial and administrative officer, American Diabetes Association in Alexandria, Va., Elizabeth J. Kingsley, an attorney with Harmon Curran Spielberg & Eisenberg, in Washington, D.C., Bob Mims, controller, Ducks Unlimited, in Memphis, Tenn., and Fay Twersky, principal, BTW Consultants -- informing change in San Francisco.

Moderating the session were Thomas A. McLaughlin, senior manager, Grant Thornton LLP in Boston, and Paul Clolery, editor-in-chief, The NonProfit Times.

Thomas McLaughlin: Most financial professionals don't relish the moment when a television news camera turns on or a reporter flips open a notebook to take interview notes. But in today's world of closer scrutiny, some financial managers will find themselves in just such a position.

You're the CFO of a respected, visible nonprofit with many generous donors, and you stumble onto serious, undeniable evidence that the CEO has been stealing money from the organization. What do you do and how do you do it?

John Courtney: That's a very tough question and a potentially disastrous issue for the organization, and for the CFO particularly.

If there is ever an instance where you have factual basis that the CEO has been stealing money, the CFO has a fiduciary responsibility to the organization. It's very important that as soon as this information is determined to be factual, that the CFO report through various committee structures, either through the executive committee or through their finance chair, as well as other members of the organization the potential issues and to develop a process so that the situation can be thoroughly investigated.

One of the key steps is to involve your legal counsel right away so that you can ensure that as you proceed, you're proceeding in a legal fashion and an appropriate fashion.

Paul Clolery: John, when you say you have a fiduciary responsibility, does that extend to somebody who is not a CPA or have any other financial credentials behind them? You're a regular guy and you've got a couple of accounting credits and somehow you become the CFO of an organization. Does fiduciary responsibility extend to that person?

Courtney: I believe when you look at responsibility, you need to look at what's a written responsibility and what's a social responsibility. In today's environment, a social responsibility is that a CFO is going to represent the organization's best interests, and they may not necessarily be the CEO's best interests.

Elizabeth Kingsley: I pretty much agree. It's important to seek legal counsel, and if the CEO is in fact stealing money, that is something that's going to have to go to the board. They can't oversee the operation of this organization with a CEO who's stealing, who's not fulfilling the fiduciary duties.

The other thing that comes to mind is making sure that you keep a record of the factual evidence.

McLaughlin: What do you mean by a record?

Kingsley: I don't know what sort of evidence might have come to the CFO's attention, but make sure that it is preserved, because if the CEO is stealing and the person realizes you've discovered this, I don't know that that evidence is going to stay around.

Clolery: So, you want to keep copies?

Kingsley: Yes, keep copies, keep backups.

Clolery: What if it's a confidential document? Can you make copies of confidential documents?

Kingsley: If you properly have access to it and to see it, I think you can make a copy. You can't share it with the world, but for appropriate organizational purposes, or to share with legal counsel to allow them to reach an informed opinion it would be permissible.

McLaughlin: Bob, we're talking about ratting out your boss. What do you do in that situation?

Bob Mims: Fortunately in the nonprofit sector, I believe if you have a strong board, if you have a strong finance committee, the what-should-you-do becomes what you will do.

A CFO will go to the finance committee in our case, which would ultimately go to the board, and the CFO would feel the ability to do so without any ramifications from the CEO.

Having a strong volunteer structure, that is your board of directors, and they are your employer so to speak, gives you the ability to make some ethical decisions that might not otherwise be made.

McLaughlin: Fay, a twist on what Bob said. He said a very big phrase, “if you have a strong board, if you have a strong finance committee.” What do you do if you can't rely on your board or your finance committee to be strong in the face of this kind of situation?

Fay Twersky: They have to be strong. The board of directors has fiduciary responsibility for the organization. It is their responsibility to deal with this. I think it's really clear that the CFO has to go to the board. If they're not strong, it probably speaks to many other problems that exist within the organization, financial and otherwise.

But I was going to also answer a different question, if I may, which is that in addition to going to the board, if you really have a strong CFO and you have a strong finance committee, then hopefully it should never have gotten to this. If you're prepared, you wouldn't suddenly find out that a CEO is embezzling money.

In the unfortunate event that the person is very clever and it does happen, and there are power dynamics that make it difficult, then I think the most important thing is to be transparent about it. You must be honest to maintain your integrity and to maintain the public trust in your charity.

Clolery: It doesn't have to be outright embezzlement of cash. The crook could set up an office supply company and then be running all the charity's business through that company. There are any number of ways to steal. Is the CFO looking at the contracts? Is the CFO running the contracts past the board?

Twersky: The CFO should be overseeing the financial life and health of the organization. Financial controls should be in place so that long before there's a sudden revelation, the CFO will have some sense of money coming in, money going out, and what's happening with all those different sources of revenue and expenditures.

Mims: That gets back to internal controls. That's a great question that you ask. In our case, we've got an organization of about $150 million in expenses every year and our CFO signs every check over $500. So as a matter of fact, he does know where every dollar's being spent.

McLaughlin: Let's shift gears a little bit and think in terms of unexpected publicity for financial reasons. This is the situation when the camera turns on or the notebook flips open. Should the top financial person ever be the point person for dealing with external parties in financially-related communications of a serious sort?

Courtney: There's probably nothing more serious for an organization than if a CEO is accused of embezzlement, and the public and the press would certainly pick up on that. In terms of the CFO being the point person with the press, I believe that in most instances that's probably not the correct model. The correct model would be to have someone who's trained and is an expert in the communications business and in the press business. Have that person explaining and looking to gather information so that your organization is presented in the most appropriate and the best light, the most accurate light.

McLaughlin : That would work in large, well-endowed organizations. What about the small- or medium-size organization that doesn't have the resources or the staff to communicate professionally with media?

Courtney: It's a difficult question and a challenge for smaller organizations because you're getting to the point where you can stretch one's area of expertise, and something that's just as simple as misspeaking can create huge negative repercussions for the organization if something was inaccurately portrayed.

I think that you would still try to look for someone who has some media training. And if you're the CFO of a small organization, it's probably a good idea to invest in some media training if you're going to be representing your organization in the public.

Twersky: I think board members should step up and be the spokespeople. They really are the volunteer leaders who govern the organization. In tough times, they have to face the music. They have to stand up and lead.

Kingsley: When The Washington Post or whoever is knocking on your door, often as the lawyer, I'm the one who gets the call, “What should we do?” I think that often the legal answer is not the right one, because “we didn't break the law” is not what The Washington Post wants to know about. It's what were your greater responsibilities or perceived responsibilities to the public, to the people you serve.

You need to know whether you broke the law and what you should or shouldn't say in that regard, but it's only a small part of the picture in answering that public inquiry.

McLaughlin: There's a balance here that's implicit in the situation; expertise in dealing with external parties such as the media versus internal expertise in managing financial affairs. Are you all saying that it's the expertise in dealing with external parties that's more important than knowledge of the subject at hand?

Mims: Not necessarily. I'm happy to have a media person deliver the message, but the CFO better be in the room because the CFO is probably best poised with the best understanding of what has really happened or that can give the best picture of the organization.

So if you can't afford one, then I'd be calling a good friend or I'd make good friends with someone who could help me in delivering that understanding, or at least train the CFO to be able to communicate that understanding. The CFO probably has the best understanding of the organization. I would say it's the CFO's responsibility to be able to deliver that understanding, both internally and externally, because with the media you've got one shot. Once the bullet goes through, there's no retrieving the bullet and retractions.

Kingsley: I'd agree with what's been said. I do think it's important to think about who's going to be the public face, the public spokesperson. But there are certain times where the CFO has such technical or specific knowledge about the organization that they are going to be the best person to communicate at least a piece of the answer.

I think the worst mistake that you can make when Mike Wallace shows up on your doorstep is to look like you're hiding something: “We're not going to let you talk to a CFO, he doesn't have media training” is not a good attitude to take. I think you want to be prepared as best you can for dealing with that situation. But sometimes you really want to bring forward the person who has the information.

McLaughlin: Would you ever refuse to talk to a reporter? Should you? If the CFO is not the best person always to carry the message but somehow the opening arrives for them, can you gracefully get out of it? Do you want to?

Courtney: It's important to understand exactly what is being looked for so that you can speak intelligently about the issue. And I think there are ways to ensure that you have very good relationships with the media. You don't waste anyone's time. You have the proper people in the room so that they can get their answers appropriately.

So, to your question, can you gracefully get out of a situation you really shouldn't be in? Absolutely.

Clolery : Members of the media were early adopters of technology and database searching. In this age of computer-assisted reporting, with the ability to merge databases, how much do the CFO/CEO have to know about what's going on within their community? It's not just their nonprofit, but the financial works of similar nonprofits in that community?

Courtney : That's an excellent point. I believe the role of the CFO has really evolved and changed. Whereas it used to be internally focused, it's much more of a combination internally and externally focused. It's imperative that the CFO not only understand what their organization is doing, but also understand their counterparts or competitors, whatever terminology you want to use.

You need to understand what the 990s say for your competitors, and you need to be able to benchmark yourself not only for your own personal information and information for your organization, but in case you do get questioned about it.

Kingsley: A lot of the time, media inquiries are not about actual legal improprieties but about things that look bad. It may not look so bad if it's standard practice. You need to be able to answer that this is how it's commonly done. It may seem odd if you're not familiar with this part of the nonprofit sector, but this is how it operates.

Mims: Benchmarking is an ally, in my opinion, to be able to understand where your organization is. Benchmarking can also be an enemy, of sorts, in that there are so many variables between nonprofits that some people who are not as experienced in nonprofits don't see. Some may be in direct mail; some may be in other types of fundraising. It's the CFO's responsibility to be able to take someone who's interviewing them and say, ‘Look, this is the difference and you need to understand the differences.'

McLaughlin: You see benchmarking as a tool for helping you deal with those external-focus questions?

Mims: Yes, because what ends up happening is you get a report that someone will come up with a new calculation. All of a sudden I'm ranked third out of 100 in worst performers, whereas last year I was third out of 100 in best performers. Well, it's not necessarily the media that I have to answer to, it's the board.

When I go to the board, I'm showing them the numbers and I'm saying here are the differences. We need to understand what these differences are and then make tweaks in our business model if our business model is in fact inefficient.

Twersky: Well, I have a very different perspective on this question. My advice when a person comes to your door to ask why you are 2 1/2 percent above or below your competitor down the street is to offer a countervailing bottom line, which is a social bottom line.

Nonprofit organizations are not just in business to do business and maintain a certain percentage of overhead, but actually to make a difference and create some kind of social value.

Part of the answer to the media when they compare your overhead to the group across town has to be “look at all we've done. I'm not sure what their social outcomes are, but let me tell you about how many lives we've saved, how many children we've helped to learn to read, and how many elderly people we've brought meals to and helped them to live healthier lives.”

McLaughlin: How do you respond when they say so you don't care that you're more expensive than your counterparts?

Twersky: Oh, we do care. We try to balance financial responsibility with social responsibility. We're not just in the business of making money. We balance a business mission with our social mission. If it takes a few more cents on the dollar to make a real difference, then that's what we will do because we are committed to making a real difference.

McLaughlin: The inquirer says so does the other group. The other groups balance their mission, too. How do you respond to what are becoming in some cases from the electronic and print media hostile inquiries?

Twersky: Benchmarking is important. It is important to look at what other organizations are doing and to learn from best practices. If you don't know what the other groups' social outcomes are, then you say, “Well, I don't really know how they're doing, what it takes in terms of their dollars to produce their outcomes. But, I'd like to learn.” Be transparent.

I would not reciprocate the hostility or degrade my so-called competitors.

Courtney: I think Fay has a very good point. One of the key challenges in the nonprofit industry is that we need to do a much better job of being transparent, not only in terms of how we operate financially but also how we are accomplishing our program and mission objectives.

That's one of the key fallacies, or the flaws in the Form 990 process right now. The public is crying out for understanding: “What are you doing with my money, how can I be assured that you're a good custodian of my funds.” The lack of outcome-based information on a Form 990 is a real problem. Right now we're only looking at numeric or financial data as it relates to program allocations and so forth, which the public by and large doesn't understand and probably will never understand.

McLaughlin: If you could get the IRS to put whatever measures or blank boxes on the Form 990 that you'd like, what would you ask them to put on?

Courtney: I don't know if it's necessarily the IRS that I would ask. There needs to be a process where a donor can go to ensure that they're giving money to an organization that's accomplishing its mission and doing it in a very efficient way. We've just been approved to use a seal from the Better Business Bureau Wise Giving Alliance. That's one way of getting that information out there and ensuring that this organization has integrity and meets certain financial and organizational benchmarks.

Clolery: You bring up a good point of external seals of approval. Are you saying that financial statements, the balance sheet of a nonprofit should also be transparent and open to the public so that that checks and balances can be seen, that social outcomes can be shown?

Courtney: There are probably more efficient ways of doing that in terms of publicizing what you're spending your money on compared to how much money are you receiving. You have very good data from the 990 on what your revenues and what your expenses are, but what does it mean? What was the effect that you made using these tax-free dollars?

McLaughlin: That relates to Fay's point about emphasizing the social outcome and the social responsibility of the organizations, not just the bottom line. But the fact is we're still dealing with a world which largely looks for one or two metrics. In the for-profit world, it's how much did you make last year and how much did you return to your stockholders. In the nonprofit world, the metrics are less clear.

Specifically, what are the metrics the outside world is looking at and what should the metrics be?

Kingsley : The one that gets the most attention is your fundraising ratio, the percentage of funds raised that are spent on fundraising. I think that's seriously flawed. That is not necessarily the best way to determine whether an organization is achieving its mission effectively.

Clolery: John just said that they just got this wonderful seal of approval from the Better Business Bureau. That's exactly how they determine it.

Kingsley: It's one thing they look at. Alone, that is not a very effective way to analyze organizations. With similar organizations that are raising and spending dollars in similar ways, it may be more informative. But I don't think across the sector you can take that single number and pick the best charity.

Courtney: To that point about the Better Business Bureau seal, I'll just comment briefly that they look at a wide variety of issues, including governance issues. What are your practices in terms of governance? Are they best practices? Do you have a board meeting? Do you have the financials distributed? They look at a number of things, not just financial. They look at governance issues, as well as other issues to help put that seal of approval in place.

Clolery: Yes, but if you cross the 35 percent threshold, ding -- thanks for playing.

Mims: I think fundraising efficiency is one of the worst, overused terms of efficiency. It can easily be distorted if you have a blue-collar donor base. It is obviously much more costly to raise money from somebody who's making $20,000 a year than someone who can give $1 million immediately.

That doesn't even speak to direct mail. Direct mail, which is even a more inefficient way to raise money, might be the best way for you to get a message out.

A much more effective tool for me is the program efficiency. That's the tool that we use: How much of the money that we spend is used on our program. The media gets caught up in these numbers and the press gets caught up in these different efficiencies.

It's not as sexy to say Ducks Unlimited saves more acres of wetlands than anybody else; rather, some might want to look at the fundraising numbers instead of the real mission.

McLaughli n: Just to clarify, what do you mean by “program efficiency”?

Mims: Program efficiency is the amount of money that is spent on your program divided by the total expenses.

McLaughlin: You can get both from the second page of the 990?

Mims: Yes, which goes to my other issue, which is that the 990 can be distorted.

One of our huge issues at Ducks Unlimited is we have two organizations that work hand-in-hand. We have our endowment organization and we have Ducks Unlimited, both of which we combine for financial statement purposes. When you slice them, they do not look at all like the organization really looks, and you're having to deal with two 990s. We actually combine our 990 into a pro forma, but the IRS does not accept this version, and it is difficult to ensure that all media and watchdog groups understand us.

Clolery: You're suggesting that the metric should not be how much money is raised, but how whatever money you have is divided up?

Courtney: That's a great metric.

Twersky: It is not just how it's divided up, but how effective is it. Program efficiency has to be balanced with program effectiveness. If you're spending $5 a person and not actually having an impact, then what good is it? If it takes $10 to deliver the service in the best way possible, then that's what you need to spend.

McLaughlin: I suspect that for most of our readers, you're preaching to the converted. I doubt that you'd hear much disagreement. So, speak to those who don't get it, those who are more interested in simple, quick metrics that they can pull off the Internet from the 990. How do we scope the message to those folks who are not among the converted?

Courtney: What we do at the American Diabetes Association is really focus on our mission. More than 18 million people in the United States have diabetes. We focus on that every dollar that we raise works to cure and care for people affected by diabetes, and how it particularly focuses on children. The growth of diabetes in children is just astounding and a national health problem.

When I speak before clubs or organizations, and particularly with volunteers or donors, I rarely talk about our 990. I talk about what we're doing with the money. I think that's the key focus an organization should take, what are you doing with the money and how is it benefiting the organization, the members, and society as a whole.

Clolery: John, you said you rarely talk about the 990. I'm curious, how many of your board members see the 990 before it gets filed? Is there a sign-off process? Are they actually involved in seeing the final numbers since they have a fiduciary responsibility for the organization?

McLaughlin: Do they know there's a 990?

Courtney: Yes, all of our board members receive the 990 on an annual basis. First it's vetted through our audit committee and then our finance committee and then the total board. We operate in a very transparent fashion. And quite frankly, this is one of the changes that we've made over the recent years. We believe it's very important that the board understand the 990, because of the two areas people look at -- functional allocation for fundraising expenses and CEO compensation.

I think there's no greater issue that people are looking at today than CEO compensation. So that's the second line people go to right away to see who's making money. I know when I get The NonProfit Times, that's the first thing I look at when that survey comes out.

McLaughlin: What are some of the other flash points? We've established the percentage of fundraising, the CEO's salary and perhaps other senior executives. Where else are you feeling scrutinized or potentially at risk for external scrutiny, especially scrutiny that might be misunderstood?

Mims: I think the audited financial statements provide a much more clear picture than the 990, simply because they would be rolled up. We don't issue the 990 in the annual report. We issue the financial statements and then we have the CEO and the CFO certify those financial statements as an additional stamp of this is really the message that we're sending to you.

McLaughlin: Just to clarify, Bob, you said that your 990 perhaps reflects a distorted picture because of the rules that you have to follow in assembling it and that you would prefer the audited financial statement. Why is there such a difference?

Mims: To clarify, we have one organization, Wetlands America Trust. Its sole mission is to serve Ducks Unlimited. Some of the items that occur inside the Wetlands America Trust, if you just looked at Ducks Unlimited as a stand-alone 990 and it's a separate 501(c)(3) organization, you would not get the full picture of the kind of year that we had. The revenue doesn't match. The expenses don't match.

What would match is the rolled-up financial statements. We issue combined financial statements on an audited basis.

McLaughlin: What I'm hearing in bits and pieces is that those required reports are beginning to move ever so subtly from requisite things, things that you have to do, to elements of strategy in fundraising, in dealing with or heading off unfavorable publicity.

Are we getting to the point where those reporting tools are becoming strategic as much as financial?

Courtney: That's an excellent question, and you're absolutely right. The reason it's happening is because donors today are much more educated and vested in giving their money. They want to understand what the organization is doing now and how efficiently they're going to spend their money.

So as a role from financial reporting, typically we focus strictly on the numbers. Now we need to focus much more on what those numbers and those funds generate in terms of outcomes, because that's what we're here for.

Mims: I agree. I would just add that this is all great news. The media, they're smarter. Hopefully we're smarter, and the donors are smarter. So they have a better understanding of why they're giving and what they want to give to. I think it's good news.

Clolery: I recently saw a 990 that was more than 1,000 pages. There's ample opportunity for attachments to your Form 990. Why can't you make these social arguments within the form 990 on an attachment?

Kingsley: I think you can. I think people under-use it. The more the 990 is getting looked at as a key research tool for an organization or for people interested in organizations, the more important it is to make some of that case. Use attachments. There is a place to talk about program accomplishments.

If you want to do that, I think the opportunity is there. But it's not designed for that. It doesn't necessarily elicit the information effectively. It lets you tell your story. I think there is a need for something else that goes beyond what the 990 makes available.

Clolery: Can you give readers some tips on how to creatively use that 990 so you can get that social message out?

Courtney: I think the 990 is a very effective tool at looking at the financial organization. It's pretty simple; you can look at it very quickly and get a basic understanding of the organization's financial position.

It's not so simple, to your point, Paul, about putting outcomes or accomplishments, because it's not the best way to just put a whole bunch of program reports in there. In fact, what may be a better approach is to just have a few sections in there, outline the three or five top program accomplishments within your organization, and then that way, someone can see by looking at five boxes what you're all about.

Twersky: How does that tell the whole story when we just tell the success stories, when it's just about, look how great we are? The next set of questions really is so why is there still so much poverty and why are there still so many people who are vulnerable in our society?

It's hard to solve social problems. I think it's very important to talk both about the successes, and about the challenges, to tell the truth and to be transparent about it in any forum, 990 and otherwise. Telling the full story is really informing consumers and donors about what you've accomplished, how effective you've been and that there's still more to do.

McLaughlin: Currently, CEOs and CFOs of publicly held companies have to sign off on their financial statements. Should nonprofit organizations have the same requirement? It's a philosophical question.

Twersky: Yes, it is important for nonprofit executives to say, “I'm signing this, I believe it's true, and I'll stand behind it.”

Mims: I'd say philosophically, yes, because we do. This past year, we had the CFO and the CEO of our organization certify the financials.

McLaughlin: Even though you didn't have to?

Mims: Correct.

Kingsley: Certainly the CEO and CFO should be willing to stand behind the financials, and as Fay expressed it, say that they believe this to be true and they've reviewed it, and think it's reasonably accurate.

I'm not sure that a certification that it's absolutely 100 percent accurate and we haven't made any mistakes and we'll personally guarantee that is fair to ask. But they should be able to stand behind the numbers they're putting out there.

Courtney : I think as a best practice, nonprofit organizations should always have the CFO and CEO sign the 990s and their financial statements.

Clolery: The nonprofit world has long been led by visionaries, people who see the big picture and don't necessarily understand the nitty-gritty detail. I can name you five CEOs probably off the top of my head who couldn't add a column of numbers but can really deliver mission, can motivate people to deliver that mission.

Is it fair to make them sign off on something they have absolutely no concept of?

Courtney: I think it's the role of the good CFO to educate. And it's really important that the CEO, although they may not like to do it, understand what the financial structure and what the financial outcomes of the organization are. It's the CFO's responsibility to ensure that the CEO is properly educated.

So I would take that as a task for the CFO to educate that CEO.

Twersky: I have seen a lot of visionaries mismanage nonprofit organizations into bankruptcy. Success depends on the right combination of vision and management.