Board Member Review of Form 990

Washington Monument May 2011, Catherine M. Pennington, CPA, Manager, Renner & Company, CPA, P.C.
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Serving on the Board of a nonprofit organization has always involved financial responsibilities including approving budgets, investigating operating variances and
making tough funding decisions. Those responsibilities increased two years ago with
the issuance of the new IRS Form 990, Return of Organization Exempt From Income Tax.

The revised Form 990 has expanded the amount of information required to be reported to the IRS. Nonprofit organizations are not only required to report more financial details but must also report on their governance procedures and policies. The IRS and potential donors use this expanded information to evaluate how the organization uses its resources and how it is governed. For example, one question asks whether Board members are provided a copy of the Form 990 prior to its filing. While it is considered a “best practice” to follow this policy, the question does not ask whether the Board members actually review the Form. Many Board members believe that such review is part of the fiduciary responsibilities of an active Board member. At the same time, even the most conscientious Board members may not be sure of the best way to exercise oversight of the organization’s Form 990. This article provides guidance for
Board members to help them perform an effective, Board‐level review of the Form 990 while not duplicating the review already performed by the organization’s staff.

When reviewing the Form 990, Board members should focus on five key areas:

• Overview of the Numbers
• Key Ratios
• Your Story
• Governance Review
• Supporting Schedules

Overview of the Numbers
The first step in a Board‐level review should be to tie down just a couple of the many numbers being reported on the Form. While Board members should make sure management performs a detailed review of the numbers, they should start their review by getting a base level of comfort about the numbers on the return. A Board membercan achieve such a level of comfort on the financial parts of the form by pulling out the audited financial statements (or internally generated reports, if no audit was done) and matching Total Assets, Total Net Assets, Total Revenues and Total Expenses on Part I of Form 990 to the figures on the audited financial statements. A couple of other numbers that a Board member should read are the compensation amounts reported on Form 990 Part VII, and the relationships between those compensation amounts and the three types of expenses reported on Part IX. By comparing the key Form 990 totals to the audited or internal financial statements, a Board member can get comfortable with
the numbers being reported on the Form.

Key Ratios
The IRS Exempt Organizations Division annually produces its “Workplan” to focus its efforts on various aspects of tax filing and compliance. This publication offers an excellent window into the current thoughts of the IRS. The 2011 Workplan for nonprofit organizations includes a focus on the relationships between executive compensation and program expenses, between program and fundraising expenses, and between program expenses and revenues. The IRS focus on these relationships should help steer a Board member’s review of the Form’s numerical aspects. There are no hard and fast rules for appropriate ratios between these numbers. After all, each organization is different, but excessive compensation is always a hot target for the IRS. The 2011 Workplan also made it clear that the level of program service expenses is important.

In addition to the IRS, there are other groups that also perform careful reviews of the expenses reported on Form 990. For example, the Better Business Bureau’s Wise Giving Alliance has developed standards to assist charitable donors in making sound giving decisions. The Alliance recommends the charity should (1) spend at least 65% of total expenses on program service activities and (2) spend no more than 35% of its contributions on fund raising expenses. The Alliance also recommends limiting the charity’s available unrestricted assets to no more than three times the expenses of the prior year’s results or current year’s budget, whichever is higher. Another nonprofit organization, Guidestar, provides free on‐line access to thousands of Forms 990. Guidestar’s website also provides tools for analyzing and benchmarking compensation
across its database. As nonprofit organizations compete for funding it becomes more and more important to compare favorably with other nonprofit organizations.

Your Story
The next area in the Board‐level review is Part III, Statement of Program Service Accomplishments. This section provides an organization with the opportunity to tell its story. A bit of bragging about the accomplishments for the year is appropriate, especially if it includes some statistics about clients served, members in attendance at educational sessions, pounds of food distributed, etc. As a Board member you want to see the organization get credit for its good work but you also want to verify that those accomplishments are still in line with the original exempt mission of the organization. It’s not unusual for an organization to evolve and modify its mission over time. It only becomes a problem when the changes are so substantial that the current operations of the organization are no longer covered under its exemption.

Governance Review
Part VI is the next section a Board member should review. This is the area in which an organization reports on its governance. Governance is an area that is coming under increasing scrutiny both by the IRS but also by donors and members. Any organization not adopting and following “best practices” for nonprofit organizations will have some explaining to do and may suffer both financially and in accomplishing its mission. As a member of the body charged with governance, a Board member needs to exercise his or her responsibilities and assist their organization in developing the best possible governance structure. Review of this section, and comparison with what the Board member knows about their organization, can help lead to improvements in the operation and reputation of the organization.

Supporting Schedules
For the final part of a Board member’s review I recommend at least a high level reading of the many attached schedules now required with Form 990, especially Schedule O. It is in these schedules that more details emerge about many of the questions raised in the basic sections of the Form. Even a cursory reading can provide important information about an organization.
Board membership has changed over time from honorary advisory and fundraising roles to today’s important fiduciary responsibilities. Mirroring this change is the evolution of the Form 990 from a very simple return of a few pages that was often not shared with the Board to the current, extensive financial and management report with an implied expectation of Board input and review. The suggestions in this article will help Board members fulfill some of their fiduciary responsibilities through an appropriate high‐level review of the organization’s Form 990.

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