Something NFP board members need to know about insolvency…

It’s not unusual for not for profit board members to fail to scrutinize the financials. This isn’t good.  There are likely several reasons why this routinely happen.  After all, many NFP directors:

  • are not compensated for their work;
  • see their primary responsibility on the board as attracting new members, helping to seek more contributions and making a contribution for an annual event/dinner;
  • look to the president, executive director, treasurer and/or management of the NFP to ensure that all is going well; and
  • sit on a large board which tends to diffuse a sense of personal responsibility.

Unfortunately, for a variety of reasons (not the least of which is this challenging economy), NFPs do become insolvent, even when the NFP directors are scrutinizing the financials.  Janet Kleinfelter’s posting in The Watchdog yesterday raised the interesting issue of whether anyone cares about the bankrupt NFP.  Ms. Kleinfelter works in the Tennessee attorney general’s charity unit and she tells the story of a NFP where all the board members “washed their hands” of the organization once it was no longer financially viable.

Ms. Kleinfelter reminds all that “legally the board is required to dissolve the nonprofit, but when it fails to do so, that responsibility falls to the regulators and that courts.”  And when that happens, she reminds us, directors may incur personal liability.  Read her fine article for more details.

And, if you serve on the board, just remember, the best thing you can do for a NFP organization is to keep your eyes on the finances.