Audits, Plans Prevent Financial Problems

By Mel and Pearl Shaw

Part three of a three-part series Taxation, financial management and gift acceptance are three topics we discussed with Memphis attorney Van Turner, a partner in the law firm Brittenum Bruce PLLC.

In regards to taxes, Turner said, “Yes, nonprofits are exempt from paying federal income taxes as long as they maintain their charitable purpose, apolitical purpose. I must note here that nonprofits are forbidden from engaging directly in politics. While 501(c)(3) nonprofit corporations can encourage the franchise of voting by encouraging citizens to vote, they cannot support one candidate or one political party over the other.”

We also wanted to know about financial management. He told us that “a nonprofit is like any other business in that regard. Solid financial management is a must. It is advisable to address a system of checks and balances in the by-laws and to require an annual audit of the financial records.

“If the money just disappears and the board allows it to happen, then the board will be held accountable along with whoever took the money. If the board had strong procedures and the officers simply stole the money, then the board should probably investigate seeking criminal as well and civil remedies against the bad actor. The nonprofit could also purchase insurance to help cover the cost of theft or embezzlement.”

There are fundraising-related legal issues as well, and Turner addressed these. “I suggest that nonprofits develop a gift acceptance policy. This policy will assist developing a planned and orderly method of knowing which gifts to accept and how to handle the gifts when accepted.

“For instance, if property is donated to the nonprofit, the nonprofit must develop a procedure for making sure they are receiving good title and that they are not accepting a landmine which would cause more headaches. Also, the policy could assist with spelling out some of the tax issues which may come up with certain types of gifts.

“A written pledge can be legally binding in some states if there is consideration involved. However, this is a state-specific issue and may vary from state to state. Consideration is simply ‘the thing of value’ each party to a contract agrees to give in exchange for what he or she receives. So, for instance, if a nonprofit was going to name a building for someone who pledged a large sum of money and the nonprofit began construction on the project, the court may rule that there was consideration and find that the donor is legally bound to the pledge.”

When asked what a board member should do if she suspects misappropriation of funds, Turner responded, “The board should immediately remove the executive leader from the bank accounts. Further, the board should then request an audit to see what has been misappropriated. Furthermore, the board should also alert the authorities as to what has occurred.

“The board should also seize the executive’s computer. Even if the executive has deleted emails and materials on the computer, those materials can be retrieved and can assist in trying to figure out what happened with the money.”

You can reach Turner at or 271-3794.

Mel and Pearl Shaw are the owners of Saad & Shaw. They help nonprofit organizations and institutions rethink revenue sources. They are the authors of “How to Solicit a Gift: Turning Prospects into Donors.” Visit them at or call 522-8727.