Top Challenges for Nonprofits – Part II

In part I of this post, we began a discussion of the key challenges nonprofits face today.  Here in part II, we continue to look at how the slow economic recovery has impacted the industry.

Market Volatility

Many organizations set aside operating reserves and/or board designated net assets, which they can tap to cover operating expenses in a down economy. Due to the market volatility over the past few years, these funds have not generated the kind of investment incomes that nonprofit organizations have learned to depend upon previously.

Additionally, a large number  of nonprofit organization’s endowment funds are currently underwater or just starting to get back on solid ground depending on  where the endowment funds are in the their lifecycle. Investments following 2008 have generated net losses or very low returns, and earnings have been forgone or principal has decreased. To continue to fund programs, organizations are now being forced to turn to unrestricted and operating reserves or are being forced to cut programs that in many cases the organizations can ill afford to cut, since they provide services to some of the neediest.

Staff Size Reductions

During the recession, many nonprofit organizations cut staff and resources in order to meet budgetary requirements and did not replace employees when they left. Over the past four years, we’ve seen nonprofit organizations ask staff to do more with less, and now we’re seeing an impact on morale, turnover and other areas within the organizations. Decreased staffing levels are also creating issues around internal controls—especially segregation of duties—which leads to increased risk of fraud. Many organizations haven’t taken the time to look at financial reporting processes and policy and procedures manuals to ensure that even in a period of downturn, they still will have strong internal controls and segregated staff.

Lack of Audit Committee Training and Financial Understanding

In the post-Enron era, we saw many nonprofit boards and audit committees taking their fiduciary responsibility much more seriously than they had previously.  There was an increased awareness of the need to ask deep and provocative questions and verify key internal controls. However, over the course of the recession, this has fizzled to some degree. The major issues faced by nonprofit organization audit committees are now centered on more complex accounting standards—particularly the ever growing compliance requirements. Additionally, many audit committee members do not have individuals with accounting and financial backgrounds or skill sets. Boards meet only a few times a year, and agendas are full, so ensuring the right level of training for and fiduciary responsibility of a nonprofit organization is difficult. Nonprofits should consider bringing in advisors to conduct governance seminars to help boards understand their responsibility and financial transactions.

Accountability of the Board of an Organization

Boards have a lot of different roles, depending on the organization. Generally, they are visionary and strategic. Often there are questions within boards about how accountable they should be to their organization and about the role the board plays. The main role of a board is governance.  The board members must understand the risks faced by their organization, and how management mitigates those risks through policies, procedures and internal controls.  Where risk is not adequately mitigated by management, the board must come up with additional policies and procedures and work with management to mitigate those risks. This does not have to be an expensive process with a consultant—it can be a conversation in an environment where everyone can speak openly about what could go wrong in the nonprofit organization from a financial perspective, a governance perspective, and even a reputational perspective. Risk assessment is a crucial practice, as we’ve seen from the number of organizations that have dealt with issues of fraud, inaccuracy in financial statements, or poor reputation—issues which years and even decades later, they still are struggling to recover from.

Nonprofits have always struggled with issues of efficiency and transparency, but in the current environment of decreased funds and increased scrutiny, all of these issues are intensified. Looking forward, nonprofits must maintain their focus on addressing these issues in order to succeed. Equally important, as the economy recovers nonprofits must use lessons learned to prepare for the next downturn, since history is so prone to repeat itself.