Jean Salenc'on, Member of the Académie des sciences (France); Member (Emeritus) of the Académie des technologies (France); Senior Fellow of the Institute for Advanced Study, City University of Hong Kong.

• Notice to Readers iiiAbout the Authors vPreface viiAcknowledgments ix1 Increased Complexity and Mounting Challenges: Time to Prepare 1Call to Action 6Conclusion 62 Roles of the Board and Management 9Governance in the 21st Century 10Purpose of the Governing Board 11Board Committees 12Legal Responsibilities of the Board 13Lesson Learned 13Lesson Learned 13Lesson Learned 14IRS Form 990 and Governance 14Frameworks for Good Governance 15Panel on the Nonprofit Sector Framework—Good Governance Model 16Legal Compliance and Public Disclosure 17Effective Governance 20Conclusion 30Appendix A—Comparison of Key Objectives of the Board of Directors With the Good Governance Framework and Questions From IRS Form 990 32Appendix B—Example Dashboard for Board Evaluation 35Appendix C—Sample Board Self-Assessment Document 373 Legal and Ethical Imperatives for Leadership 39Legal Accountability 40Ethical Accountability 41Who is Accountable for Accountability? 43How to Instill Ethical and Legal Accountability 44Honest Communications 44Strong Relationships 44Internal Controls 45Clear Expectations 45Skilled Boards 45Involved and Informed Boards 45Financial, Document, and Ethics Audits 45Compliance Officers 46Resolving Dilemmas 46What About WholeHealth? 48Conclusion 494 When Management and the Governing Board Disagree 51The Head Game 52Communication 53Constructive Norms 55Negotiation 57Assisted Resolution 59Conclusion 605 Understanding the Financial Statements of Nonprofit Organizations 61Characteristics of Nonprofits 62Responsibility for Financial Information 62Basis of Presentation for Financial Information 63Cash Basis of Accounting Versus Accrual Basis 63Basic Financial Statements 64Footnotes to the Financial Statements 65Fund Accounting 66Assets 70Liquidity 70Cash and Cash Equivalents 71Revenue, Receivables, and Deferred Revenue 72In-Kind Contributions 75Long Term Contributions 76Conditional Promises to Give 77Endowments 78Split Interest Agreements 79Agency Transactions 81Nonprofit Serves as a Conduit for Cash or Noncash Donations 81Nonprofit Solicits Funds for Another Nonprofit Organization (Unrelated) 82Nonprofit Holds Funds for Another Nonprofit Organization (Unrelated) 82Nonprofit Enters Into Transactions With Related Foundations 83Inventories 83Prepaid Expenses and Investments 84Alternative Investments 84Property and Equipment 85Liabilities 85Accounts Payable and Accrued Expenses 85Mortgages and Notes Payable 86Net Assets 86Revenues and Expenses 86Conclusion 876 Risk Management 89Some Risks Can Be Mitigated With Insurance 89Cyber Risk—A Growing Threat 90Risk in a Complex World 90A Nonprofit’s Most Important Resource 91Risk Management Approach 93Enterprise Risk Management 93ERM Component One 94ERM Component Two 94ERM Component Three 94ERM Component Four 95ERM Component Five 96ERM Component Six 96ERM Component Seven 99Example Application of a Risk Management System to a Nonprofit Organization 99ERM in Smaller Nonprofit Organizations 102Risk Management Committee 103Crisis Management 104Revisiting Uncertainty 105Conclusion 105Appendix A—Risk Management Checklist 1077 Internal Controls: What Every Executive and Board Member Needs to Know 113Characteristics of Nonprofits 113Internal Control Defined 114COSO Framework Updated for Changing Times 115Distinguishing Error From Fraud 116Controls for Smaller Organizations 118Elements of Internal Control 119Control Activities 121Designing a System of Internal Control 123Entity Controls 123Control Activities 127Antifraud Programs and Controls 131Misappropriation of Assets 131Fraudulent Financial Reporting 132Revenue Recognition and Management Override 132Control Environment 133Fraud Risk Assessment 133Information and Communication 133Monitoring 134Billing Schemes, Check Tampering, and Expense Fraud 136Use of Analytical Techniques to Identify Unusual Disbursement Transactions for Investigation 140Skimming and Larceny 141Payroll Fraud 143Controls Over Noncash Items 146When Processing Is Outsourced 146Cybersecurity and Not-for-Profits 147Internal Controls Evolve 148Conclusion 149Appendix A—2013 COSO Framework 17 Principles—Summary 1508 Focus on Tax-Exempt Status 155Nonprofit Organizations and Tax-Exempt Status 156IRS Filings 157Differences Between Nonprofit and Commercial Organizations 158Recognition of Tax-Exempt Status 162Lobbying 164Public Charity or Private Foundation 166Public Support Test for Charitable Organizations 167Test 1 (509(a)(1))—Compute the Public Support Percentage 168Test 2 (509(a)(2))—Compute the Public Support Percentage 169Supporting Organizations 170Charitable Contributions 172Filing Form 990 175Unrelated Business Income 177IRS Audits 179Conclusion 180Appendix A—Guide for the Board’s Review of Form 990 181Appendix B—Important Filings for Tax-Exempt Organizations 185Appendix C—Governance Policies and Procedures 1889 The Courage to Lead 189Moral Courage 189Barriers to Ethical Action 191Strategies for Ethical Action 194Have a Clear Compass 194Know Your Objective 195Seek Advisers and Allies 195Walk the Walk 196Understand Change Strategies 196Practice Considerate Communication 197Conclusion 19710 Change Management 199Understanding Change 200Be Clear About What You Want 202Assess Before You Act 203Create Awareness and Urgency 204Create a Powerful Coalition 205Communicate 207Address Obstacles and Blockers 208Create Short TermWins 210Give People the Tools to Succeed 210Solidify Changes 211Suggestions for Sonja 212Be Clear About What You Want 212Assess Before You Act 212Create Awareness and Urgency 213Create a Powerful Coalition 214Address Obstacles 214Communicate 215Create Short Term Wins 215Give People the Tools to Succeed 215Solidify Changes 215Conclusion 21511 Integration for Action 217Case One: AWoman Scorned 217Prevent 218Address 219Improve 220Case Two: The Indeterminate Sentence 221Prevent 222Address 225Improve 225Case Three: Your Turn 226Sustained Success 227Conclusion 227Glossary 229Bibliography 235Suggested Reading 239

Jean Salenc'on, Member of the Académie des sciences (France); Member (Emeritus) of the Académie des technologies (France); Senior Fellow of the Institute for Advanced Study, City University of Hong Kong.

• Notice to Readers iiiAbout the Authors vPreface viiAcknowledgments ix1 Increased Complexity and Mounting Challenges: Time to Prepare 1Call to Action 6Conclusion 62 Roles of the Board and Management 9Governance in the 21st Century 10Purpose of the Governing Board 11Board Committees 12Legal Responsibilities of the Board 13Lesson Learned 13Lesson Learned 13Lesson Learned 14IRS Form 990 and Governance 14Frameworks for Good Governance 15Panel on the Nonprofit Sector Framework—Good Governance Model 16Legal Compliance and Public Disclosure 17Effective Governance 20Conclusion 30Appendix A—Comparison of Key Objectives of the Board of Directors With the Good Governance Framework and Questions From IRS Form 990 32Appendix B—Example Dashboard for Board Evaluation 35Appendix C—Sample Board Self-Assessment Document 373 Legal and Ethical Imperatives for Leadership 39Legal Accountability 40Ethical Accountability 41Who is Accountable for Accountability? 43How to Instill Ethical and Legal Accountability 44Honest Communications 44Strong Relationships 44Internal Controls 45Clear Expectations 45Skilled Boards 45Involved and Informed Boards 45Financial, Document, and Ethics Audits 45Compliance Officers 46Resolving Dilemmas 46What About WholeHealth? 48Conclusion 494 When Management and the Governing Board Disagree 51The Head Game 52Communication 53Constructive Norms 55Negotiation 57Assisted Resolution 59Conclusion 605 Understanding the Financial Statements of Nonprofit Organizations 61Characteristics of Nonprofits 62Responsibility for Financial Information 62Basis of Presentation for Financial Information 63Cash Basis of Accounting Versus Accrual Basis 63Basic Financial Statements 64Footnotes to the Financial Statements 65Fund Accounting 66Assets 70Liquidity 70Cash and Cash Equivalents 71Revenue, Receivables, and Deferred Revenue 72In-Kind Contributions 75Long Term Contributions 76Conditional Promises to Give 77Endowments 78Split Interest Agreements 79Agency Transactions 81Nonprofit Serves as a Conduit for Cash or Noncash Donations 81Nonprofit Solicits Funds for Another Nonprofit Organization (Unrelated) 82Nonprofit Holds Funds for Another Nonprofit Organization (Unrelated) 82Nonprofit Enters Into Transactions With Related Foundations 83Inventories 83Prepaid Expenses and Investments 84Alternative Investments 84Property and Equipment 85Liabilities 85Accounts Payable and Accrued Expenses 85Mortgages and Notes Payable 86Net Assets 86Revenues and Expenses 86Conclusion 876 Risk Management 89Some Risks Can Be Mitigated With Insurance 89Cyber Risk—A Growing Threat 90Risk in a Complex World 90A Nonprofit’s Most Important Resource 91Risk Management Approach 93Enterprise Risk Management 93ERM Component One 94ERM Component Two 94ERM Component Three 94ERM Component Four 95ERM Component Five 96ERM Component Six 96ERM Component Seven 99Example Application of a Risk Management System to a Nonprofit Organization 99ERM in Smaller Nonprofit Organizations 102Risk Management Committee 103Crisis Management 104Revisiting Uncertainty 105Conclusion 105Appendix A—Risk Management Checklist 1077 Internal Controls: What Every Executive and Board Member Needs to Know 113Characteristics of Nonprofits 113Internal Control Defined 114COSO Framework Updated for Changing Times 115Distinguishing Error From Fraud 116Controls for Smaller Organizations 118Elements of Internal Control 119Control Activities 121Designing a System of Internal Control 123Entity Controls 123Control Activities 127Antifraud Programs and Controls 131Misappropriation of Assets 131Fraudulent Financial Reporting 132Revenue Recognition and Management Override 132Control Environment 133Fraud Risk Assessment 133Information and Communication 133Monitoring 134Billing Schemes, Check Tampering, and Expense Fraud 136Use of Analytical Techniques to Identify Unusual Disbursement Transactions for Investigation 140Skimming and Larceny 141Payroll Fraud 143Controls Over Noncash Items 146When Processing Is Outsourced 146Cybersecurity and Not-for-Profits 147Internal Controls Evolve 148Conclusion 149Appendix A—2013 COSO Framework 17 Principles—Summary 1508 Focus on Tax-Exempt Status 155Nonprofit Organizations and Tax-Exempt Status 156IRS Filings 157Differences Between Nonprofit and Commercial Organizations 158Recognition of Tax-Exempt Status 162Lobbying 164Public Charity or Private Foundation 166Public Support Test for Charitable Organizations 167Test 1 (509(a)(1))—Compute the Public Support Percentage 168Test 2 (509(a)(2))—Compute the Public Support Percentage 169Supporting Organizations 170Charitable Contributions 172Filing Form 990 175Unrelated Business Income 177IRS Audits 179Conclusion 180Appendix A—Guide for the Board’s Review of Form 990 181Appendix B—Important Filings for Tax-Exempt Organizations 185Appendix C—Governance Policies and Procedures 1889 The Courage to Lead 189Moral Courage 189Barriers to Ethical Action 191Strategies for Ethical Action 194Have a Clear Compass 194Know Your Objective 195Seek Advisers and Allies 195Walk the Walk 196Understand Change Strategies 196Practice Considerate Communication 197Conclusion 19710 Change Management 199Understanding Change 200Be Clear About What You Want 202Assess Before You Act 203Create Awareness and Urgency 204Create a Powerful Coalition 205Communicate 207Address Obstacles and Blockers 208Create Short TermWins 210Give People the Tools to Succeed 210Solidify Changes 211Suggestions for Sonja 212Be Clear About What You Want 212Assess Before You Act 212Create Awareness and Urgency 213Create a Powerful Coalition 214Address Obstacles 214Communicate 215Create Short Term Wins 215Give People the Tools to Succeed 215Solidify Changes 215Conclusion 21511 Integration for Action 217Case One: AWoman Scorned 217Prevent 218Address 219Improve 220Case Two: The Indeterminate Sentence 221Prevent 222Address 225Improve 225Case Three: Your Turn 226Sustained Success 227Conclusion 227Glossary 229Bibliography 235Suggested Reading 239

Jean Salenc'on, Member of the Académie des sciences (France); Member (Emeritus) of the Académie des technologies (France); Senior Fellow of the Institute for Advanced Study, City University of Hong Kong.

• Notice to Readers iiiAbout the Authors vPreface viiAcknowledgments ix1 Increased Complexity and Mounting Challenges: Time to Prepare 1Call to Action 6Conclusion 62 Roles of the Board and Management 9Governance in the 21st Century 10Purpose of the Governing Board 11Board Committees 12Legal Responsibilities of the Board 13Lesson Learned 13Lesson Learned 13Lesson Learned 14IRS Form 990 and Governance 14Frameworks for Good Governance 15Panel on the Nonprofit Sector Framework—Good Governance Model 16Legal Compliance and Public Disclosure 17Effective Governance 20Conclusion 30Appendix A—Comparison of Key Objectives of the Board of Directors With the Good Governance Framework and Questions From IRS Form 990 32Appendix B—Example Dashboard for Board Evaluation 35Appendix C—Sample Board Self-Assessment Document 373 Legal and Ethical Imperatives for Leadership 39Legal Accountability 40Ethical Accountability 41Who is Accountable for Accountability? 43How to Instill Ethical and Legal Accountability 44Honest Communications 44Strong Relationships 44Internal Controls 45Clear Expectations 45Skilled Boards 45Involved and Informed Boards 45Financial, Document, and Ethics Audits 45Compliance Officers 46Resolving Dilemmas 46What About WholeHealth? 48Conclusion 494 When Management and the Governing Board Disagree 51The Head Game 52Communication 53Constructive Norms 55Negotiation 57Assisted Resolution 59Conclusion 605 Understanding the Financial Statements of Nonprofit Organizations 61Characteristics of Nonprofits 62Responsibility for Financial Information 62Basis of Presentation for Financial Information 63Cash Basis of Accounting Versus Accrual Basis 63Basic Financial Statements 64Footnotes to the Financial Statements 65Fund Accounting 66Assets 70Liquidity 70Cash and Cash Equivalents 71Revenue, Receivables, and Deferred Revenue 72In-Kind Contributions 75Long Term Contributions 76Conditional Promises to Give 77Endowments 78Split Interest Agreements 79Agency Transactions 81Nonprofit Serves as a Conduit for Cash or Noncash Donations 81Nonprofit Solicits Funds for Another Nonprofit Organization (Unrelated) 82Nonprofit Holds Funds for Another Nonprofit Organization (Unrelated) 82Nonprofit Enters Into Transactions With Related Foundations 83Inventories 83Prepaid Expenses and Investments 84Alternative Investments 84Property and Equipment 85Liabilities 85Accounts Payable and Accrued Expenses 85Mortgages and Notes Payable 86Net Assets 86Revenues and Expenses 86Conclusion 876 Risk Management 89Some Risks Can Be Mitigated With Insurance 89Cyber Risk—A Growing Threat 90Risk in a Complex World 90A Nonprofit’s Most Important Resource 91Risk Management Approach 93Enterprise Risk Management 93ERM Component One 94ERM Component Two 94ERM Component Three 94ERM Component Four 95ERM Component Five 96ERM Component Six 96ERM Component Seven 99Example Application of a Risk Management System to a Nonprofit Organization 99ERM in Smaller Nonprofit Organizations 102Risk Management Committee 103Crisis Management 104Revisiting Uncertainty 105Conclusion 105Appendix A—Risk Management Checklist 1077 Internal Controls: What Every Executive and Board Member Needs to Know 113Characteristics of Nonprofits 113Internal Control Defined 114COSO Framework Updated for Changing Times 115Distinguishing Error From Fraud 116Controls for Smaller Organizations 118Elements of Internal Control 119Control Activities 121Designing a System of Internal Control 123Entity Controls 123Control Activities 127Antifraud Programs and Controls 131Misappropriation of Assets 131Fraudulent Financial Reporting 132Revenue Recognition and Management Override 132Control Environment 133Fraud Risk Assessment 133Information and Communication 133Monitoring 134Billing Schemes, Check Tampering, and Expense Fraud 136Use of Analytical Techniques to Identify Unusual Disbursement Transactions for Investigation 140Skimming and Larceny 141Payroll Fraud 143Controls Over Noncash Items 146When Processing Is Outsourced 146Cybersecurity and Not-for-Profits 147Internal Controls Evolve 148Conclusion 149Appendix A—2013 COSO Framework 17 Principles—Summary 1508 Focus on Tax-Exempt Status 155Nonprofit Organizations and Tax-Exempt Status 156IRS Filings 157Differences Between Nonprofit and Commercial Organizations 158Recognition of Tax-Exempt Status 162Lobbying 164Public Charity or Private Foundation 166Public Support Test for Charitable Organizations 167Test 1 (509(a)(1))—Compute the Public Support Percentage 168Test 2 (509(a)(2))—Compute the Public Support Percentage 169Supporting Organizations 170Charitable Contributions 172Filing Form 990 175Unrelated Business Income 177IRS Audits 179Conclusion 180Appendix A—Guide for the Board’s Review of Form 990 181Appendix B—Important Filings for Tax-Exempt Organizations 185Appendix C—Governance Policies and Procedures 1889 The Courage to Lead 189Moral Courage 189Barriers to Ethical Action 191Strategies for Ethical Action 194Have a Clear Compass 194Know Your Objective 195Seek Advisers and Allies 195Walk the Walk 196Understand Change Strategies 196Practice Considerate Communication 197Conclusion 19710 Change Management 199Understanding Change 200Be Clear About What You Want 202Assess Before You Act 203Create Awareness and Urgency 204Create a Powerful Coalition 205Communicate 207Address Obstacles and Blockers 208Create Short TermWins 210Give People the Tools to Succeed 210Solidify Changes 211Suggestions for Sonja 212Be Clear About What You Want 212Assess Before You Act 212Create Awareness and Urgency 213Create a Powerful Coalition 214Address Obstacles 214Communicate 215Create Short Term Wins 215Give People the Tools to Succeed 215Solidify Changes 215Conclusion 21511 Integration for Action 217Case One: AWoman Scorned 217Prevent 218Address 219Improve 220Case Two: The Indeterminate Sentence 221Prevent 222Address 225Improve 225Case Three: Your Turn 226Sustained Success 227Conclusion 227Glossary 229Bibliography 235Suggested Reading 239