Discussion:Conflict of Interest question.
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Discussion Forum Index --> Accounting Questions --> Conflict of Interest question.
| 13 December 2007 | |
| I am a memeber of a fairly large non -profit organization. We have about $2 million in annual income, a mortgage of about $1.8 million & cash on hand of of about $1 million. All of our members are volunteers. All of the above accounts are with the same bank. One of the people being considered for treasuer, is a vice-president of the same bank. What do you think about any conflict of interest?? | |
| December 13, 2007 | |
| What does the organization's conflict of interest policy say? | |
| 13 December 2007 | |
| I'm not sure there is one, the policies & procedures have not been updated in many years. I wanted to know if people on Tax Almanac thought this was a conflict? | |
| 13 December 2007 | |
| I think Sarbanes Oxley requires that you have a written conflict of interest policy, no matter the size of the charity. I can't remember, but I bet Natalie will know for sure, she's often here in the "evening" (HI time) I believe... Might be the time to get one drafted by counsel in your area. | |
| December 13, 2007 | |
| SOX does not have any requirements for nonprofits, but it is often used as a "best practices" source. A conflict of interest policy is highly recommended by the IRS but not required. For organizations that are just applying for exemption, the IRS requires they tell how they will handle conflicts (so they might as well just have a policy and be done with it). There are also questions on the 990 that ask about conflicts of interest. I would recommend the organization draft a policy and implement it.
Is the banker currently a board member? Or is this someone who would be new to the board? When you say all of the "members are volunteers," are you referring to board members only? | |
| 13 December 2007 | |
| The banker is not currently a board member but is a volunteer. All members of the organization ( board & all others) are volunteers. | |
| 13 December 2007 | |
| There is nothing objectionable to the banker being a board member.
However, I don't feel it would be appropriate for this person to be the Treasurer, or in any way be involved where it involves decisions involving the bank account. | |
| 13 December 2007 | |
| Uncle Same: Thanks for your reply. Why do you believe this person should not be trasurer? | |
| 13 December 2007 | |
| HarryEA,
Good internal controls call for a segregation of duties. In this case, if he is a vice-president of the same bank where the non-profit does its business, he is in a position to exert influence over personnel at the bank (unless you discount the fact that it seems everyone at banks these days has the title, "Vice President", including the tellers). It's too risky to me about the appearance of impropriety. He might be the "Mother Teresa" of bank VP's, but in this case, you are better off making that individual the board secretary and not the treasurer. Tom | |
| December 13, 2007 | |
| U.S. and Tom brought up a very good point. You and the rest of the board will need to look at that issue carefully because most of the time it is the treasurer who has the authority to sign checks, open accounts, etc. Are the rest of the board members financially savvy? Would they be able to tell if something is remiss? Who does the books? If the organization already has a loan, how easy would it be to open another one and have the funds used for personal stuff?
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| 14 December 2007 | |
| Let me give you a LIVE example of WHY a bank officer should not have any control over the organization's funds.
I previously prepared an annual compilation and 990 for an exempt organization in my local area. It started in mid 1990s. Every year the financial secretary would bring his write up to my office, I would go through and reconcile the bank accounts, make year end journal entries, prepare financial statement and 990. When the financial secretary died, a new person came on board. This person was a branch manager of a local bank, and the main operating account to the organization was with this bank (not necessarily that particular branch). As soon as he came on board, I was advised that the organization didn't need my annual services any more. This went on for about 4 years. Are you ready? It turned out that this guy wrote checks to cash, checks to his girlfriend, make checks to cover his divorce debts, lost his job at the bank, never did a bank rec, etc etc. No one insisted upon seeing financial information until such time as the organization started having financial problems and couldn't pay major bills, then someone suggested that someone else in the organization see the financial records. This financial secretary, over a 3 year period embezzled about $ 100,000. The organization wound up taking him to court, went to the insurance carrier - and wound up collecting about $ 85,000 of it. Couldn't prove the remainder because the financial secretary destroyed the records. This could happen with anyone - but with a person who has control on both sides - makes it easier to commit fraud. NOW do you see why you don't place a person who has a position with the same financial institution as the organization's funds become Treasurer of the organization? | |
| December 14, 2007 | |
| That's a very good example. As soon as you were terminated, U.S., that should have been a warning sign to the board that something was remiss. | |
| 14 December 2007 | |
| It turns out that after this skunk was caught - and the $ 85,000 recovered, the organization came back to me to do the annual compilation and 990.
The new financial secretary is not connected with any bank, is some sort of business executive - but is religious in bringing me his spread sheet with ALL the financial records to back the transactions up immediately after the close of the fiscal year. He's got paper trail for EVERY transaction. Seems like after going through that miserable experience, the organization's policies became much more structured so as to prevent a repeat performance. | |
| December 14, 2007 | |
| That's great news! I've had two clients who did not learn the first time. | |
| 14 December 2007 | |
| And even if the guy was honest, the temptation would be to steer too much business to his bank, which might result in a misallocation of capital/reserves by the non-profit. i.e. perhaps some of the money/reserves should be in T-bills, or who knows what, as a proper investment allocation of reserves. A very prominant, and very venerable stamp collecting organization made a huge bet on the dot.bomb mania circa 1998-99, and just about lost it all. | |
Bottom Line (talk|edits) said: | 15 December 2007 |
| I'm on the Board of a non-profit with annual revenues of around $100K. I'm the Treasurer and do the bookkeeping but am NOT a signer on the bank accounts and do not have custody of the checkbook. The President, VP and Secretary are signers and two signatures are required. An independent EA does the tax return every year. I like the idea of a banker being the Treasurer with some qualifications. The banker does not do the bookkeeping and is not a signer on the bank accounts. The banker should also remove himself from the room whenever the Board discusses relationships (deposits and loans) with banks because of potential conflict of interest. Remember to limit deposits to the FDIC insurance limits. | |
| 16 December 2007 | |
| With respect to internal controls, remember they are as much a protection for the employee as for the employer. With improper internal controls an employee is more likely to be accused of a theft he/she did not participate in. Also, remember that locks keep honest people honest. Or, more accurately everyone can be tempted at some point, so let's not put them in a position to be tempted. | |
Bottom Line (talk|edits) said: | 16 December 2007 |
| Agreed | |
