Sound financial management is among the most important responsibilities of the board of directors. The board should establish clear policies to protect the organization’s financial assets and ensure that no one person bears the sole responsibility for receiving, depositing, and spending its funds. Day-to-day accounting and financial management should be the task of staff or, in the case of organizations with no or one staff member, designated volunteers who have the necessary time and skills. The board is responsible for reviewing practices and reports to ensure that those staff or volunteers are adhering to the board-approved policies.

• A budget is the financial expression of an organization’s yearlong plan.
• As bearers of fiduciary responsibility for the organization, the full board should approve the budget and receive regular financial statements to monitor the implementation of the budget. 
• The board approves policies and reviews reports to ensure the organization is following sound financial practices. 
• Whatever the level of operational reserves or an endowment, the board needs to establish policies for managing and investing these funds.

• IRS Form 990 inquires whether the organization relies on an independent accountant to compile, review, or audit its financial statements.  The key is an independent accountant — a person who is not providing other financial services to the organization.
• IRS Form 990 asks organizations to provide information about the value and use of endowment funds and board-designated funds that function like an endowment (also referred to as quasi-endowments). 
• Private foundations may not engage in risky investments or will face excise taxes. In IRS Form 990-PF, foundations need to provide detailed information about their investment practices and results. 
• Most states have laws that govern the investment, management, and expenditure of funds held by charitable organizations.

Federal law generally does not regulate the management of investment assets by public charities. Private foundations and their managers, however, are subject to penalties under federal tax law if the board approves investments “in such a manner as to jeopardize the carrying out of any of (the organization’s) exempt purposes.”¹

Under all state laws, directors must exercise their “duty of care” by providing careful oversight of the organization’s assets and financial transactions in order to protect the interests of the organization and its charitable purposes. Board members must exercise ordinary business care and prudence in providing for the short- and long-term needs of the organization when evaluating both the overall investment portfolio and individual investment decisions.

Many states have enacted legislation regulating the investment activities of trustees and directors of charitable organizations. The state standard of care applicable to most nonprofit corporations is the Uniform Management of Institutional Funds Act (UMIFA),² which has been adopted in some form by 47 states and the District of Columbia. This Act requires board members to exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of an investment decision. Charitable organizations established as trusts are typically subject to the Uniform Prudent Investor Act (UPIA), which has been adopted in more than 40 states and the District of Columbia.³ Some states also apply UPIA to charitable
corporations or specific types of funds within charitable corporations.

In July 2006, the National Conference of Commissioners on Uniform State Laws (NCCUSL)
approved the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which is
expected to supersede UMIFA in many states.⁴ UPMIFA applies to both charitable corporations and charitable trusts and provides more guidance for boards and others responsible for managing the investments of charitable organizations. It defines the following principles of prudence for those who manage and invest funds of charitable organizations:

1. Give primary consideration to donor intent as expressed in a trust instrument;
2. Act in good faith, with the care an ordinarily prudent person would exercise;
3. Incur only reasonable costs in investing and  managing charitable funds;
4. Make a reasonable effort to verify relevant facts;
5. Make decisions about each asset in the context of the portfolio of investments, as part of an overall investment strategy;
6. Diversify investments unless, due to special circumstances, the purposes of the fund are better served without diversification;
7. Dispose of unsuitable assets; and
8. In general, develop an investment strategy appropriate for the fund and the charity.⁵
   

Under UPMIFA, a charity also has the flexibility to spend or accumulate as much of an endowment fund as it deems prudent

1. How well do we review financial reports and monitor the organization’s financial performance? Do all board members have a fundamental understanding of our financial reports?
2. Do we need to upgrade the board’s financial expertise to match the complexity of the organization? If necessary, how could we accomplish this? 
3. Are we making the relevant comparisons, e.g., performance against budget, previous year’s financials, and appropriate ratios? 
4. Do we periodically assess the likelihood of significant changes in revenue? How well could the organization manage fluctuations in income? 
5. What steps have we taken to ensure that the accounting firm we have selected for our audit meets the IRS’s definition of “independent”? 
6. Has the organization established a reserve fund and if so, have policies been established that:
   

• Assess the organization’s risk tolerance?
• Oversee the management of the investments? 
• Establish minimum and maximum amounts to be kept in reserve? 
• Establish guidelines for the appropriate use of reserves?

3  Conflicts of Interest

6  Protection of Assets

11 Board Diversity

21 Financial Records

24 Resource Allocation for Programs and Administration