BOARD FIDUCIARY RESPONSIBILITY – Understanding Oversight and Monitoring Roles

1. BOARD FIDUCIARY RESPONSIBILITY – Understanding Oversight and Monitoring Roles Presented by: Dan Campbell, Partner

2. Effective Board Governance Type I - Fiduciary Type II – Strategic Governance as Leadership Type III -Generative GOVERNANCE AS LEADERSHIP by Chait, Ryan, & Taylor

3. Learning Objectives After attending this session you will have a better understanding of: Exempt organization fiduciary responsibilities Risk assessment - the purpose and process Key areas of financial oversight and monitoring Effective internal control systems

4. Effective Board Governance Type I – Fiduciary The basic work of the board includes: Financial discipline Informed oversight and monitoring Mission fidelity and program alignment Promoting the organization’s interests and insuring its integrity Selection, compensation and evaluation of the President

5. Effective Board Governance Type II – Strategic The Board and CEO (Leadership Team) think strategically and project the vision. The President/CEO, faculty and staff (Management Team) develop operational, facility, and strategic plans aligned with the vision of the Leadership Team. The Board monitors the implementation and results of the strategic plan(s) to insure that the mission of the organization is accomplished.

6. Effective Board Governance Type III – Generative Work Generative thinking or “Grappling” Emerging major issues to gain understanding and to formulate decisions. This is usually something they do together. This is not a planning activity. Grappling – open, in-depth, collaborative discussions on major issues, crises, or external policies or events that threaten the health of the institution or present new opportunities that can help fulfill institutional mission within its values.

7. Fiduciary Responsibility

8. Fiduciary ResponsibilitySumming it Up ...to act reasonably, prudently, and in the best interests of the organization, to avoid negligence and fraud, and to avoid conflicts of interest Duty of Care Duty of Loyalty Duty of Obedience

9. Fiduciary ResponsibilityDuty of Care Care that “an ordinary prudent person would exercise in a like position and under similar circumstances”

10. Fiduciary ResponsibilityDuty of Care Act in good faith Ordinary and reasonable care Best interest of the organization Exercise independent judgment Exercise adequate board oversight Be informed and follow up regularly Reflect decisions in board minutes Attend board meetings

11. Fiduciary ResponsibilityDuty of Care Ensure financial accountability by: • Overseeing the CEO monitoring the CFO • Validating that resources are used prudently • Verifying that records and reports are accurate • Ensuring that risks are evaluated and controls are reasonable to mitigate them – no one person has unlimited access or control over assets or finances

12. Fiduciary ResponsibilityDuty of Loyalty Demonstrate complete and undivided allegiance and loyalty, put the organization’s interests above personal, family, or business interests Avoid conflicts of interest Disclose all potential concerns Maintain strict confidentiality

13. Fiduciary ResponsibilityDuty of Obedience Follow governing documents Adhere with stated policies Conform actions with stated purposes Comply with laws and regulations Evaluate programs: • Effectiveness and efficiency • Accomplishing organizational purposes

14. Fiduciary ResponsibilityIt’s about Stewardship Boards should oversee and monitor all people, processes, and activities to ensure proper stewardship over an entity’s assets and activities

15. Risk AssessmentPurpose and Process

16. Risk AssessmentThe Purpose Assets are safeguarded (stewardship) Transactions are properly authorized, executed, and recorded to demonstrate proper use of resources Integrity of financial information used by the board in decision making

17. Risk AssessmentThe Purpose Financial reporting to all constituents is complete, accurate, and transparent Compliance with applicable laws, regulations, and ethical responsibilities

18. Risk AssessmentThe Process Identify financial, operational, and external risks Understand and oversee processes for internal controls Assess insurance coverage for various exposures Consider contingency plans

19. Key Areas of FinancialOversight and Monitoring

20. Key Areas of FinancialOversight and Monitoring Essential Financial Information for the Board: Budget and financial reports, dashboards Management analysis and commentary Independent audit reports Investment management reports Risk assessment summary Internal control monitoring reports Audit committee and internal audit reports

21. Key Areas of FinancialOversight and Monitoring Financial areas to monitor: Financial planning and budgeting, including cash forecasting/projections Interim and annual financial performance Contingency planning and budget changes Risk assessment and internal control systems

22. Key Areas of FinancialOversight and Monitoring Financial areas to monitor: Fraud prevention and detection measures Misconduct policy and whistleblower protection Identifying, avoiding, approving/managing conflicts of interest

23. Key Areas of FinancialOversight and Monitoring Financial areas to monitor: Reasonableness of compensation: • Employees, • Independent contractors, and • Service providers Timely payment of payroll and taxes Regulatory reporting and tax compliance

24. Key Areas of FinancialOversight and Monitoring Financial areas to monitor: Liquidity – • Sufficient cash and short term investments to cover operating cash outflows, including current liabilities • Sufficient designated cash and short term investments to cover donor restricted net assets and to avoid internal borrowing Condition of accounts receivable and payable

25. Effective Internal Control Systems

26. Effective Internal Control SystemsThe Framework The primary internal control framework used in the U.S. is based on a study of best practices and what is needed to establish and maintain an effective internal control system, referred to as COSO, resulting from a study released in 1992 by the “Committee on Sponsoring Organizations” of the Treadway Commission. COSO is an integrated framework

27. Effective Internal Control SystemsThe Objectives COSO Objectives: To provide reasonable assurance that the organization’s objectives will be met (risks mitigated) regarding: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with laws and regulations

28. Effective Internal Control SystemsThe Components Monitoring –evaluating the effectiveness of controls and reporting of deficiencies Information and communication –providing important financial and control information inside and outside the organization Control activities –implementing policies, procedures and other safeguards – preventative and detective Risk assessment –assessing risks related to financial reporting Control environment –tone at the top, core values, structure, management philosophy, and staff capabilities

29. Effective Internal Control Systems

30. COSO Cycle

31. Effective Internal Control SystemsConsidering Fraud Understand that intent is the difference between errors and fraud Consider the adequacy of fraud prevention and detection measures, including training and awareness at all levels of management Be alert to three types of fraud: • Financial Reporting Fraud • Misappropriation of Assets • External Fraud

32. Effective Internal Control SystemsThe Fraud Triangle

33. Effective Internal Control SystemsConsidering Fraud Some Areas of Fraud Risk to Monitor: Diversion of revenue or assets for personal use Vendor fraud Payroll fraud Altered checks Personal expenses paid or reimbursed Padded or duplicate expense reimbursements Lack of bank statements & reconciliations review Lack of journal entry review and approval

34. Summary Understand fiduciary responsibilities and duties, periodically evaluate board performance Focus on risks and outcomes, assess vulnerability and degree of mission accomplishment Monitor key areas of financial operations, be vigilant to know and ask questions Assure that effective internal control systems are in place and being well maintained

35. Recommended Resource

36. Recommended ResourceContact Information Dan Campbell, Partner dcampbell@capincrouse.com Atlanta 678.518.5301 Ext. 120 Columbia 803.458.2169