Q&A #130 – Is monthly distribution of financial reports to the Board a best practice?
Question: I just started as a new Director of Finance for a nonprofit organization. The Board and finance committee each meet three times per year, and I noticed that the organization only distributes financial reports at Board and finance committee meetings. I suggested that we change to monthly financial reporting and received a lot of push back from management. Is monthly distribution of financial reports to the Board and finance committee a best practice?
Answer: Monthly distribution of financial reports to the Board and finance committee is absolutely a best practice for nonprofit organizations, and I also recommend this as a must-have procedure in your accounting policies and procedures manual. Board and finance committee members have a fiduciary responsibility to help oversee and ensure the safety and proper use of a nonprofit organization’s financial assets. Monthly financial reports are a key tool for fulfilling this important role.
Board and finance committee members tend to rely too heavily on the treasurer when it comes to matters of oversight, monitoring, and safeguarding of financial assets, and ignore their own individual financial oversight responsibility roles. Understanding the different but complementary individual vs. group fiduciary roles will help to illustrate the importance of monthly distribution of financial reports and facilitate adoption of this best practice.
As individuals, each Board and finance committee member commits to a regular financial oversight role in addition to looking for guidance from a Board officer such as a treasurer, who will provide additional support, information, and feedback. Thus, it is important that there is regular screening of financial reports by individual Board and finance committee members as well as screening as a collective group.
The purpose of individual screening is to help ensure feedback and oversight from diverse points of view and expertise that collectively has a better chance to observe changes, trends, and unexpected and possibly disruptive developments as reflected by the numbers in the financial reports. Simply put, having more eyes watching over financial reports improves the chance that an abnormality will be noticed and questioned.
The purpose of a collective group-based screening of financial reports is like the individual-based screening, but with the added responsibility to act on the observations noted as a group.
In addition to this difference in purpose, there is also an important contrast in the perspective provided by individual vs. group screening. Individual screening is based on observation and questioning. Group screening is based on acting as a group governing body to ensure use of financial assets are aligned with advancing the mission, sustainability, and continuity of the organization.
In other words, individuals fill an oversight role while the governing body mainly fills the “take action” role. Without monthly distribution of financial reports, the individual oversight role is diminished and this, in turn, limits the ability of the Board and finance committee to respond to individual observations and questions by taking the appropriate actions.
From a timing perspective, frequency is also a key issue. If Board and finance committee members only receive financial reports a few times a year, too much time will elapse between meetings for Board and finance committee members to timely note changing trends and provide feedback, thereby fulfilling their fiduciary financial oversight role.
Planning Tip – Regular training along with short, easy-to-read financial dashboards are the keys to helping Board and finance committee members fulfill their individual monthly financial oversight roles between infrequent regularly scheduled meetings. Each year hold brief financial training sessions on how to read and understand monthly financial reports. This will help Board and finance committee members learn how to ask questions and understand how they are individually integral to the process of timely financial oversight throughout the year.
It is an accepted best practice to close the books and prepare financial reports each month. However, the process is not complete until the financial reports are put in the hands of individuals who are responsible for managing the organization. This includes Board and finance committee members. Both the organization and its Board and finance committee members will benefit and be better served by adopting this best practice.
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