Compliance and Best Practices

In the world of non-profit organizations, the topic of compliance is frequently not one that employees are comfortable discussing in any great detail. I have been conducting compliance audits for several years, and I have yet to encounter a non-profit organization that is willfully non-compliant. It’s not that employees of non-profits don’t want to be compliant. Rather, it is that the subject of compliance is vast and seemingly laden with pitfalls.

In late 2013 the IRS issued proposed regulations that would have redefined permissible political activities of 501c4 organizations. These regulations, if enacted, would have effectively and severely limited the ability of 501c4’s to engage in advocacy. In May 2014 the IRS announced it would scrap the proposed rule change following an onslaught of public opposition. However, the IRS said it would revisit the rule change in the future, which means that there will continue to be intense scrutiny of 501c4 organizations. Therefore, it is vital that non-profit organizations are cognizant of and compliant with best practices in the areas of finance, communications, and operations.

A review of best practices can be divided into 4 main categories: financial, human resources, operational and legal boundaries.  If your organization has engaged an independent auditor in conjunction with the preparation of your 990, many of these topics will already be familiar to you.

Financial compliance can include areas like donation processing, handling of restricted funds, coding of expenses, the accounts payable process, and the revenue recognition process.

Human resources encompasses a review of the personnel handbook, personnel files, the new employee onboarding process, benefits, job descriptions, payroll management, conflict resolution, team building, employee retention and compensation, employment classifications, training, development, and employee terminations.

Operational includes lease administration, fixed asset inventory and disposition process, vendor contracts, vendor files, business insurance, and document retention.

Legal boundaries may include 501c3/501c4 distinctions and permissible, prohibited, and limited activities for 501c3’s, communications, unrelated business income, and private benefit/inurement.

To be sure, these four categories encompass a wide range of information, and there are many points to consider within each category. The following highlights a few areas that affect any organization with employees:

• Did you know that form I-9s are supposed to be filed in a separate folder? And, if you decide to retain copies of employee’s identification, you must do so for every employee. More seriously, failure to maintain I-9s for your employees will result in fines ranging from $110 to $1,100 per violation.

• Many organizations will find out the hard way that they are not insured, or are underinsured, in areas like Director’s and Officer’s insurance, Employment Practices Liability, and Crime protection. Statistics published by the insurance industry in June 2013 revealed that more than half of all employment-related claims are filed against businesses with fewer than 50 employees, with the average cost to defend a wrongful termination lawsuit being $270,000.

• Having the proper insurance policies and limits in place is important, but there are several things an employer can do before an employee is terminated to mitigate potential lawsuits. These include developing and implementing written employment policies, maintaining ongoing communication and training with employees, providing feedback in a timely and documented manner, and conducting written performance evaluations.

• The area that is likely to draw the most public scrutiny is an organization’s communications to members, donors and the general public. It is critical to remember that your communications may eventually be seen by not only your members, but by those who do not agree with your position, as well as by government officials specifically reviewing your materials for violations of prohibited and limited activities. In that regard, 501c3 organizations face the most serious restrictions and consequences for failure to know, understand and comply with these restrictions.  There are many resources available, including IRS publications, that will allow you to become familiar with the permissible, prohibited and limited activities of nonprofit organizations.

Whether you bring in a consultant, or you develop an in-house process to review best practices, it’s important for organizations to periodically review records and processes. Don’t view this as taking time away from achieving your mission. Rather, consider the time devoted to developing and implementing best practices as time spent avoiding future problems. After all, the devil is in the details.