Fraud: Protecting Your Nonprofit


Following up on our earlier post on fraud in the nonprofit sector, here are some tips for preventing fraud and the diversion of charitable assets:

  1. Create a Strong Policy Against Fraud:  Organizations should create comprehensive and forceful policies that go beyond the words on paper. The policies should incorporate reporting mechanisms and real consequences for violations. The policy should also be tailored to the specific nonprofit, explained in detail to all employees when training, and revisited yearly for effectiveness. Additionally, the board of directors must ensure that fraud reports are taken seriously, and that outside legal counsel is brought in when appropriate.
  2. Implement a Culture of Honesty and Ethics:  In addition to an anti-fraud policy, organizations should prepare a code of conduct that incorporates a zero tolerance for unethical behavior by volunteers, employees, officers, and directors. This code should be trained, exhibited, and reinforced within every aspect of the organization, especially at the top in order to set the example.
  3. Encourage Whistleblowing:  Employees are unlikely to report theft or mismanagement if they believe that their jobs are in jeopardy. Implementing anti-retaliation protections and providing a fraud hotline for anonymous reporting may provide confidence to employees exposing abuse.
  4. Conduct Internal and External Audits:  Every effective policy requires oversight. The board of directors should establish an audit committee responsible for reviewing the organization’s financials, as well monitoring the anti-fraud policies. One suggestion for the audit committee is to conduct surprise or unplanned audits. In addition to supervision by the nonprofit’s management and board of directors, nonprofits may also engage in regular external audits by hiring a CPA or an attorney.
  5. Check Backgrounds:  Consider conducting background checks on new employees or volunteer leaders.  Pre-screening potential employees may be helpful in assessing whether the candidate has a criminal record, prior history of fraud, or heavy debts that may make fraudulent activity a bit more likely.
  6. Separate Cash Handling Duties:  Ensure that no single employee is responsible for handling cash, issuing checks, or reconciling financials.  Instead, require two signatures on checks and have at least two individuals count money and verify receipts.
  7. Prepare Responses:  Organizations should contemplate the consequences for and responses to fraudulent activities. This includes responding to small mistakes or grave deceptions, both privately within the organization and publicly to the community.

Stay turned for our next post on fraud, which will focus on what to do if your organization is victimized by fraud.


Traps for the Unwary: ABA Bar Leadership Institute 2014


I have the honor of presenting the workshop “Traps for the Unwary” at the American Bar Association Bar Leadership Institute in Chicago on March 13:

Leaders of bar associations need to be particularly attentive to risks related to the governance and operations of their organizations and how to identify and mitigate such risks. This program will explore some of the most common and noteworthy risks, including those related to board oversight, delegation of authority, conflicts of interest, contracts, employees, social media and fraud. Sound policies and plans and heightened attention to risk management will allow bar associations to better advance their missions, and bar leaders to better fulfill their roles.

Some issues I’ll address with bar association leaders:

  • How do you and your board establish the tone at the top?
  • Are you delegating responsibilities and authority with due care and oversight?
  • Do you have, implement and enforce policies regarding signing contracts and checks?
  • How do you mitigate risks of employee-related liability?
  • Are you aware of the risks of fraud and your organization’s weaknesses in preventing fraud?
  • Do your policies regarding social media use reflect thoughtfulness and care in utilizing this powerful and increasingly important vehicle?
  • Did you know you could have antitrust risks related to price-fixing or boycotting?
  • What’s UBIT and why is that important?
  • How much overlap can we have between our 501(c)(6) bar association and 501(c)(3) affiliated foundation?

My presentation materials are available online on the ABA website here.


RISK MANAGEMENT   Uncategorized

Nonprofit Radio: Fraud!




I’ll be on Tony Martignetti Nonprofit Radio on Friday, March 7, 2014, talking with Tony about fraud and what nonprofits should do to prevent and possibly report fraud. Listen in live here or catch us on iTunes.

A nonprofit victimized by fraud can find itself doubly harmed by (1) the direct loss resulting from the fraud and (2) news reports that characterize the nonprofit as untrustworthy or its leaders as culpable. It should be no surprise that the media loves to expose and publish stories about fraudulent activities in trusted organizations. And unfortunately, those stories often infer that the sector as a whole is plagued by fraud and widespread diversions of charitable assets.

Take for example this headline from a Washington Post article that created public outrage: Inside the hidden world of thefts, scams and phantom purchases at the nation’s nonprofits (10/26/13). Among the provoking statements made in the article:

A Washington Post analysis of filings from 2008 to 2012 found that [the American Legacy Foundation] is one of more than 1,000 nonprofit organizations that checked the box indicating that they had discovered a “significant diversion” of assets, disclosing losses attributed to theft, investment fraud, embezzlement and other unauthorized uses of funds. …


The diversions drained hundreds of millions of dollars from institutions that are underwritten by public donations and government funds. Just 10 of the largest disclosures identified by The Post cited combined losses to nonprofit groups and their affiliates that potentially totaled more than a half-billion dollars. …


The Post found that nonprofits routinely omitted important details from their public filings, leaving the public to guess what had happened — even though federal disclosure instructions direct nonprofit groups to explain the circumstances. About half the organizations did not disclose the total amount lost. …


The findings are striking because organizations are required to report only diversions of more than $250,000 or those identified as having exceeded 5 percent of an organization’s annual gross receipts or total assets.

And here are some of the criticisms of the article:

In The Washington Post story, the reporters had access to more than a million tax forms nonprofits filed over four years. They found that 1,000 nonprofits checked yes in response to a question on those returns about whether their group had suffered a “diversion of assets.”


Using that tiny percentage, the article then gave the misimpression that the nonprofit world is rife with “financial skullduggery,” when in fact it was the approximately 1,000 nonprofits themselves that were the victims of scams by for-profit vendors, employee theft, and outside investment advisers.

- Tim DelaneyNonprofits Must Respond Swiftly to Critical News Stories, The Chronicle of Philanthropy

[T]he lure [of the Washington Post's headline] implies that the nonprofits are involved in and parties to these “thefts, scams and phantom purchases,” as opposed to victims of people inside or outside of the organizations who were quite intent on plundering charitable resources. It looks to the Nonprofit Quarterly that the diversions reported in the article are nonprofits that had been cheated by employees, vendors, and outside financial advisors, but not engaged in trying to cheat donors or the public. …


A common problem in the press is the lumping of all 501(c) organizations into a broad “nonprofit” category, as though the problems or issues the press might find are problems of public charities. The Washington Post list combines all kinds of groups, many of which are not 501(c)(3) public charities. A striking number of the groups in the Washington Post spreadsheet were labor unions (501(c)(5) organizations) and fraternal organizations (501(c)(10) organizations).

- Rick CohenWashington Post Diversions Piece: What it Really Means, The Nonprofit Quarterly

Personally, I believe that charitable nonprofits are not plagued by fraud any worse than the for-profit sector. And the public’s higher trust in the nonprofit sector than in the public or for-profit sectors is well placed. But that is not to say at all that charities are excused from taking reasonable steps to prevent losses from fraud, properly report any diversions of assets, and/or obtain restitution.

In an opinion piece for The Chronicle of Philanthropy, Pablo Eisenberg responded to the critics of the Washington Post piece by stating:

What the critics seem to have forgotten is that nonprofit boards and executive directors have responsibility for the activities of their organizations, including the actions of their employees and investment advisers. We should expect leaders at nonprofits nationwide to be tightening their oversight to assure no unscrupulous activity is occurring. Donors should be demanding nothing less: It is their money that has been diverted in most cases, and when it isn’t, it’ s their tax money that went first to nonprofits and then to con artists.

Stay tuned for tips about addressing the risks and occurrences of fraud after the show.


Alliance for Community Media National Conference (Part One)



I have the great pleasure of speaking with Syvia Strobel (ACM) and Deborah Vinsel (Thurston Community Television) at the 2013 Alliance for Community Media National Conference on Wednesday, May 29. Our session description follows:: 

Nuts and Bolts of Nonprofits and Their People

Nonprofit organizations provide critical services, but often do so with limited resources and little time to assess legal risks and obligations. Nonprofit executive must balance their day with managing a board of directors and overseeing staff and volunteers. This workshop will provide an overview of key issues in people management, board governance, UBIT and other timely nonprofit issues. Come hear from seasoned professionals on best practices and areas of risk for our organization.

This post includes resources I'll refer to during our session.

Key Issues in People Management

Independent Contractor vs. Employee: Don't Want to Get This Wrong

Organizations must recognize how to tell whether a worker is an independent contractor or employee. And it's not just a matter of how an organization chooses to classify the worker. There are federal and state laws that inform how a worker must be classified. See Independent Contractor (Self-Employed) or Employee? and IRS Publication 1779: Independent Contractor or Employee; and in California, Independent Contractor or Employee).

Too often I hear that an uninformed employer is hiring independent contractors instead of employees because it can't afford employees. Yet, the hired workers are working full-time, indefinitely, and exclusively for the employer; they are managed on what must be done and how to do it; and they work without negotiated written contracts. In other words, they are legally employees, and the employer may be fined for failing to withhold employment taxes, breaching wage and hour laws (e.g., minimum wage, overtime, breaks), and failing to implement and/or enforce anti-discrimination and retaliation laws that may apply only to employees. In addition, the employer may find themselves unprotected by what might be very expensive workers' compensation claims. See New Crackdown on Using Independent Contractors (and the Ten Consequences of Reclassifying Independent Contractors as Employees hyperlink within the article) by Robert W. Wood (Forbes).

Organizations that may have gotten the classification wrong in the past but want to correctly classify certain independent contractors as employees going forward may be eligible to do so through the IRS Voluntary Classification Settlement Program. Forbes provides a summary of the program in this article about the amnesty program available through June 30, 2013.


Exempt vs. Non-exempt Employee: Why is This Important?

Exempt employees are those exempt from overtime pay. Non-exempt employees must be paid overtime, subject to applicable federal and state laws. Again, it's not up to the employer to classify a particular employee as exempt or non-exempt simply based on what the employer wants. There are federal and state laws that inform how an employee must be classified. See Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA).

See also Classifying Employees Correctly (National Council of Nonprofits)


Volunteer, Intern or Employee?

At first blush, it might seem simple to distinguish between a volunteer and an employee. But such distinction gets much more difficult to make when an organization pays a "stipend" to the volunteer. If the stipend is compensation for services, the paid individual may not be a volunteer and, if the payment is for regularly rendered services, may be an employee. Improper classification can raise many of the same issues described above for improperly classifying an employee as an independent contractor.

It is possible that the payment of a stipend to a volunteer may not convert the volunteer to an employee if the stipend is considered a reimbursement of certain types of expenses, a de minimis fringe benefit, or a nominal fee for service. Note that a Wage and Hour Opinion Letter (FLSA2006-28) expressed that the Department of Labor will presume that a fee paid to a volunteer is nominal as long as the fee does not exceed twenty percent of what an organization would otherwise pay to hire a full-time employee for the same services. However, organizations paying stipends to volunteers should confer with an employment/tax attorney for counsel regarding these issues.

A person receiving payment from a nonprofit may also fall under the classification of intern. Interns are also not employees and not subject to minimum wage and overtime laws under the FLSA if they meet the 6-factor test. See Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act and Legalities of Nonprofit Internships (Blue Avocado), which discusses the practical difficulties of meeting factor 4 ("The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded"). A nonprofit may seek to recognize a person receiving a stipend as only an intern as opposed to a volunteer (or volunteer intern) when such person is working in a commercial (unrelated business) activity run by the nonprofit.


Additional Resources:

  • Nonprofit Interns (National Council of Nonprofits)
  • Volunteers and Interns (Law For Change)
  • Employee or Volunteer: What’s the Difference? (Nonprofit Risk Management Center) – includes a discussion of the issues created by having an employee also volunteer for his or her employer. Note that if the employee ever says he or she was coerced to volunteer (a possibly very significant risk if the employee is ever terminated or disgruntled), the organization may face serious legal troubles.

Also see Part Two and Part Three of this series of posts.


ADRP Keynote: What You Can Learn From Recent Nonprofit Scandals

Scandal 3
Everyone loves a good scandal. That's why they fill our newspapers, television programs, and popular websites. But scandals in the nonprofit sector result in diminished or discontinued services, laid off employees, penalties imposed on responsible persons, publicly embarassed board members, and the death of organizations. They also result in a loss of public trust and can lead to substantial changes in the law.

On April 2, 2013, I had the great pleasure of presenting as the keynote speaker for an Association of Donor Relations Professionals Regional Workshop. The topic:  What You Can Learn From Recent Nonprofit Scandals.

Here are 7 key points from my presentation:

  • Board composition and numbers matter; guard against founder's syndrome
  • Policies are important but must be understood, implemented and enforced
  • Public perception is critical – be careful of conflicts of interest and sweetheart transactions, even if they are not unlawful – be responsive 
  • Communications responding to crises that are only CYA pieces will not fool the public
  • Delegate, but only with due care and proper oversight (e.g., reporting)
  • Outside assistance can be invaluable (e.g., audits, legal opinions, investigations)
  • Donor relations professionals should review their organizations' key communications, including their websites and the Form 990

Here are 3 opinion articles for The Chronicle of Philanthopy we've written covering recent nonprofit scandals:

'Three Cups of Tea' Scandal Offers Lessons for Charities and Trustees

Avoiding Trouble: What Nonprofits Can Learn From Sex-Abuse Scandal

Basic Board Governance Failures Stand at the Center of the Penn State Debacle


Screwtape’s 10 Tips for Nonprofits That Want to Generate Business Revenues


  1. Start a business, any business. And act quickly! Get on the social enterprise bandwagon. You can’t rely just on fundraising anymore.
  2. Invest in pet projects of your key leaders and split the profits with them.
  3. Sell all kinds of merchandise with your name and logo if you can’t think of anything else. That always works.
  4. Come up with cool things to sell to millennials and focus all your marketing efforts on reaching them.
  5. Remember you’ll always have a competitive advantage in any business over a for-profit business because, as a nonprofit, you’re more trustworthy and you’re tax-exempt. UBIT? Nonsense. Nobody pays that.
  6. Go big or go home; invest whatever you can in the new business venture even if you have to deplete your reserves. You can’t win if you don’t play the game. But see #7 and #8 for places where you can save.
  7. Keep the staffing costs down by using your existing staff to run the new venture. No matter how busy they are, they’ll learn to manage. They always do.
  8. Keep professional fees low by using self-help books, volunteers, and, if you have to use professionals, the most inexpensive professionals you can find (they're all the same).
  9. Have your executive director make it his or her priority to get the new venture off the ground. Use revenues-based bonuses to get your E.D. motivated.
  10. Look for partnerships with any for-profits that will donate a part of its sales to your organization in exchange for some publicity. That's just free money.

Editor's Disclaimer: At the risk of offending Screwtape, always consider the source of any tips before relying on them.


Gift Acceptance Policies – NCPGC Program Presented by Barbara Rhomberg

             Gift Tax Lemon

On January 12, 2012, I attended the progam "Gift Acceptance Policies: Why, When, What, How, and Who" presented to the Northern California Planned Giving Council by exempt organizations attorney Barbara Rhomberg.  Using the example of the Trojan Horse, Barbara quickly convinced us that not all gifts are good ones and the time for a gift acceptance policy is before a charity accepts a problematic gift.  Here are some highlights of her talk [and some of my thoughts in bracketed text].

There are 5 factors a charity must consider before accepting a noncash gift:

  1. Costs of ownership.
  2. Costs associated with the sale.
  3. Staff/volunteer time required.
  4. Exposure to liability [and other harm].
  5. Marketability of the gifted asset and any cash flow associated with it.

In addition, a charity must assess the impact of any restrictions on the use or disposition of the asset (e.g., prohibitions against a sale, endowment-related issues); any strings and conditions (e.g., naming opportunities, payment of associated legal or appraisal costs); embarassing gifts (e.g., due to nature of donor's business); and tax shelters.

Gifts of real estate may be of great value to a charity.  But there may also be significant costs of ownership (e.g., maintenance, insurance, property taxes) and sale.  Additionally, there may be risks of environmental liability (particularly with undeveloped land or land with prior commercial use), title problems, prior mortgages/liens, and marketability.  [For fiscal sponsors, there must be consideration of what the sponsoring organization will do with real estate secured for a project if the project committee fails to raise sufficient funds and/or disbands.]

Planned gifts (e.g., charitable remainder trusts, charitable lead trusts, charitable gift annuities) will require special consideration.

A gift acceptance policy will help protect a charity from accepting a bad gift, expedite the acceptance of a good gift, facilitate the tactful decline of a gift, and evidence an appropriate level of governance [which will be reflected on its Form 990]. A good policy will answer the following questions among others:

  • What assets can be accepted?
  • Who will review the assets and how will they be reviewed?
  • How will restrictions, strings, and conditions be evaluated?
  • Who can accept the asset?

While charities will not want to be bound by rigid rules that fail to consider special circumstances that might make an exception in order, a good policy will identify who is authorized to make such exceptions (e.g., executive director, board committee, or board).  A good policy will also take into account the charity's unique set of facts and circumstances.  And a charity will benefit from the experience of working through development of its own gift acceptance policy that considers its own unique set of facts and circumstances.  Simply copying a template document may be do more harm than good though review of a few strong templates may be a great place to start.

Resources suggested by Ms. Rhomberg include:

Gift Acceptance Policies – Why, When, What, How, and Who – Barbara Rhomberg

Effective Gift Acceptance Policies and Procedures – David Wheeler Newman

Model Gift Acceptance Policy and Procedures - David Wheeler Newman

Understanding and Drafting Nonprofit Gift Acceptance Policies – Kathryn W. Miree

Great presentation, Barbara!


5 Social Media Myths

Pot of gold

Last year, a study conducted by the University of Massachusetts Dartmouth Center for Marketing Research (“US Charities’ Adoption of Social Media Study,” August 2010) reported that the largest nonprofits are outpacing for-profit companies and academia when it comes to social media use. Among its findings (based on the 200 largest U.S. charities) were that 97% of the charities are using some form of social media and more specifically, 93% have a Facebook profile, 87% have a Twitter presence, and 65% have a blog. While the nonprofit sector becomes increasingly present on social media applications each year, it still remains a challenge for many nonprofits to do so successfully. Although we cannot address all of the challenges to becoming a successful social media story, here, we debunk five social media myths for nonprofit organizations.
1. If you know social media, you can do our social media.

New users to social media may often seek the help of others who have a greater degree of expertise with these software applications. Generally not all social media experts are alike. An individual’s expertise on social media may be on very specific aspects such as programming, marketing, or social media law. An expert in one respect may not be the appropriate expert in all respects. For example, an expert in branding may not be the best person to task with developing the technical aspects of a website that promote the brand (e.g., widgets, feeds, linking multiple social media accounts); similarly, a technician who could accomplish those tasks may not be at all familiar with the organization’s mission or image and how to best communicate with its constituents. Organizations should reflect on the strengths of the social media experts they hire or task with managing the organization’s social media efforts and evaluate whether other skill sets are necessary. Some organizations may be fortunate enough to find a “Jack of all trades” but in many situations it may be necessary to have multiple people behind the social media curtain with discrete tasks that collectively create a powerful online social media presence for the organization.

Additionally, an individual’s ability to use social media personally does not necessarily equate to an ability to harness the power of social media for an organization. In other words, an individual who is successful in building his or her personal online reputation and network may not necessarily be the best ambassador to communicate with the public and manage communications on behalf of the organization. Individuals vary in the way they use social media – some are constantly locked into the Internet, posting every hour, while others may limit their posts to one per day; some attract new followers with strong personalities while others present a much more distant persona. An organization should discuss the mission, image, and online objective of the organization with those who are communicating on behalf of it – such as the tone of the messages, the level of humor and personality to be used, appropriate and inappropriate subject matter, the frequency of messages, and the organization’s intended audience.

2. Social media is as simple as it looks.

Looks can be deceiving. The user-friendly interface of many social media applications often does not reflect the complexity of social media such as various levels of privacy settings available, the capacity of its reach, or the implications of posting content. Implementation of social media simply should not occur without an appropriate level of social media education.

Additionally, while it may be easy to create an account and start posting, tweeting, blogging, and the like, the real leverage of various social media will likely not be realized without some strategy or sense of direction. As Beth Kanter explains in her article, “9 Ways Nonprofits Can Excel Using Social Media,” audiences expect a conversation with organizations through social media, not just messaging. Furthermore, as Victor d’Allant noted at the Haas School of Business Social Media for Good event earlier this year, “It’s not about the tools; it’s about the story you want to tell.” Failing to cultivate relationships through (avoidable) missteps such as inconsistent messaging, inefficient communications, and a lack of targeted audience can significantly detract from the many benefits that social media offers. Thus, organizations should not rush to have an online presence simply because it can be done without first thinking about the objectives and goals of the organization in using social media and which medium or combination of media will help it to achieve the best value and impact. The online presence of an organization should simply be an extension of its offline existence and both should be managed so as to help the other in accomplishing the mission of the organization. An organization’s thoughtful plan should be the driving force, not the excitement or ease by which an organization can suddenly appear online.

Furthermore, it is important to note that social media education is an ongoing process. Social media sites such as Facebook, Twitter, YouTube, LinkedIn and Tumblr are constantly being updated to provide new features and new ways of connecting and sharing. Accordingly, organizations must not only make efforts to stay updated on changes but also periodically re-evaluate whether they are using the best platform for their message.

3. We can’t measure ROI for social media.

While measuring the return on investments (ROI) for social media efforts is often a new and challenging task for many organizations, organizations should still take steps towards gauging ROI to ensure efficient and proper use of their budgets and staff and volunteer time.

The simple fact is social media is an investment whether in terms of time, energy, money, or otherwise. For example, a 2010 survey conducted by the Nonprofit Technology Network, Common Knowledge, and the Port, “Nonprofit Social Network Benchmark Report” reported that 84.9% of surveyed nonprofits committed at least 1/4 of a full-time staff member’s time to maintaining their commercial social network. Additionally, a 2010 Ventureneer survey, “Nonprofits and Social Media: It Ain’t Optional” reported that nonprofits highly successful at social media allocate at least 25 hours of staff time per week to social media (including the time for researching and writing in providing content for tweet, blogs, and Facebook). If such time is used efficiently and purposefully, it may be time well spent. If not, this can be a serious loss of resources to an organization.

Social media measurement will not be a one size fits all. As Ventureneer notes, it is important to remember expectations and measurements change with time, “your first forays into social media will not yield great results.… [Y]ou must prepare the field before you harvest.” Additionally, other circumstances such as budget and staff skill may also influence what analytical and measurement tools are available to the organization. Ventureneer provides three helpful, general tips for measuring social media:

(1) Focus on measuring what matters at this moment. Do you want to generate awareness, build community, drive traffic to your website, advocate about an issue, raise money or integrate social media into a cause marketing campaign with a partner organization? Measure only what you need to know to evaluate this effort.

(2) Focus on what can be counted in a practical and affordable manner.

(3) If you need help, get it. Metrics matter. Take a class, a webinar or hire a consultant to explain the details until you can do it yourself. Don’t guess. Don’t miss this opportunity to broaden your funding base, find out what appeals to your supporters, and expand your reach.

For more information on social media measurement, please view Beth Kanter’s articles, “The Real Housewives of Social Media: Measurement Tips” and “Spreadsheet Aerobics: Actionable Measurement for Social Media.”

4.    It won’t happen to us.

With the popularity of social media also came the fear about the ease and risk of regulatory violations with social media. For example, a 2010 Proofpoint, Inc. study, “Outbound Email Security and Data Loss Prevention in Today’s Enterprise,” surveyed 261 large U.S. companies during June and July of 2010. Among other findings, the study noted the survey group of these large U.S. companies reported that:

  • 20% have investigated a leak of information to a social network site in the past year;
  • 25% investigated a leak of confidential or private information to a blog or message board;
  • 17% investigated exposure of confidential, sensitive, or private info by a SMS or Twitter in the past year; and
  • More than half are highly concerned about information leakage by social media sites.

Nonprofits are not immune to similar social media problems and the vast majority will have few resources to handle such concerns. Furthermore, there is often a lack of guidance from regulatory bodies regarding the use of social media by nonprofits. For example, the IRS rarely addresses the Internet, let alone social media, in any formal guidance on how online communications will be viewed by the IRS with respect to its regulations (e.g., the implications of “Likes” on Facebook and re-tweets on Twitter of political candidates with respect to the IRS electioneering rules). Thus organizations should take care to put policies in place and have appropriate systems for monitoring what is being disseminated on behalf of, or related to, the organization, even if they don’t think any of the social media nightmares seen in the media will happen to them.

For more information on intellectual property risks with social media, please view our previous post, “Top Ten Legal Risks for Nonprofits.”

5.    The “delete” function actually deletes.

Although “deleting” a post may remove it from your screen, the “delete” button never truly deletes the information. Not only is the information stored on servers, there is also a good chance someone out there has seen the posted information no matter how quick one attempts to undo it. Even if nothing bad happens legally speaking, nonprofits cannot forget that the public eye is generally always watching and consequences can occur on a variety of levels such as reputation, inconsistent mission messaging, and time and costs incurred down the line to fix a neglected and seemingly minor error.

While there is some truth to the notion that social media is a trial-and-error experience, it is not mutually exclusive to the idea of taking appropriate recovery steps after-the-fact. Organizations should think at least generally about a recovery plan if an error occurs, especially one that is to the detriment of the organization. In fact, some organizations have been applauded for their excellent recovery efforts from such errors. A recent example is the American Red Cross “#gettingslizzerd” tweet in which an American Red Cross employee accidentally posted a tweet on the American Red Cross Twitter account that was intended for her personal account. The errant tweet stated: “Ryan found two more 4 bottle packs of Dogfish Head’s Midas Touch beer… when we drink we do it right #gettingslizzerd.” The American Red Cross was commended by the public for acknowledging a “Twitter faux pas” had occurred and timely responding with a witty tweet on behalf of the organization: “We’ve deleted the rouge tweet but rest assured the Red Cross is sober and we’ve confiscated the keys.”  Thus, mistakes or social media “faux pas” are not an automatic death sentence for an organization’s social media efforts and may actually present an opportunity for recognition when handled well.

(More coverage on the American Red Cross “#gettingslizzerd” story, please read the Tactical Philanthropy article, “The Story Behind Red Cross’s Twitter Faux Pas” and the Nonprofit Quarterly article, “Tweet Freely: Your Social Media Policy and You”).



BoardSource Leadership Forum 2010 – Part II: Top Ten Legal Risks for Nonprofit Boards


In the session “Top 10 in 2010: Legal Risks Facing Nonprofit Boards” at the BoardSource Leadership Forum 2010, Melanie Lockwood Herman, Nonprofit Management Risk Center, and Jeffrey S. Tenenbaum, Venable LLP, presented their list of the top ten legal risks facing nonprofit boards:

  1. Exposures from social media use, misuse, and naiveté
  2. Going rogue: the unhappy employee
  3. IRS Form 990 and federal tax-exempt status
  4. Copyrights and Trademarks
  5. Lobbying and political activity compliance
  6. Third-party sexual harassment
  7. Failure to limit contracting authority and other common mistakes in contracting
  8. Lack of synchronicity in board policy and practice
  9. Failure to understand and manage conflicts of interest
  10. Reliance on the good will, good nature (and insurance coverage) of others

This post highlights key considerations from the presentation on the seven legal risks covered most in-depth by the presenters.

Social media

Tenenbaum highlighted two main concerns of social media legal risks: intellectual property (IP) and employee use. He emphasized that these risks can arise whether the social media use is for official or personal purposes.

Nonprofits are increasingly using social media to disseminate information through platforms such as Twitter, Facebook, and blogs. The risk is two-fold. On one hand, when an organization makes accessible its own IP on the web, it may be concerned that others will use the IP in a way that was not intended or not known by the organization. On the other hand, when an organization uses or includes the IP of others, the risk of copyright infringement liability may be heightened if not done properly.

Employees present another major risk area in their use of social media for both official purposes and personal use (whether at work or at home). Risks include:

  • Vicarious liability (i.e., the organization is held liable for the employee’s actions).
  • The threat of, or defending against, lawsuits such as defamation (the number one area of lawsuits connected with social media).
  • Negative publicity when an employee’s statements for personal purposes are perceived as being made on behalf of, or associated with, the organization.


  • Establish a social media policy (e.g., when to use disclaimers, guidelines for use of the organization’s or others’ IP, etc.).
  • Provide a process in the employee handbook or social media policy if there are plans to monitor employees’ use of social media [Ed.: An employer’s right to monitor employee use of social media is not absolute. Please check appropriate laws.].
  • Always keep in mind: “Just because [social media] is easier and quicker doesn’t mean it deserves a less rigorous review.”

It is important to note that the law surrounding social media is developing. For example, just one week before the forum, a Regional Director at the National Labor Relations Board filed a complaint against American Medical Response of Connecticut, Inc. for allegedly firing an employee for posting negative comments about her supervisor on her personal Facebook page. (The complaint is currently waiting to be heard before an Administrative Law Judge.).  Such current events can help organizations understand where the law might be heading which in turn can help shape appropriate policies. Accordingly, organizations should periodically revisit discussions about these social media risks as major legal developments in this field occur.

Unhappy Employees

Herman highlighted a new concept entering the workplace liability conversation known as “workplace bullying” which is part of the Healthy Workplace Bill Campaign that started in 2001 to enact state anti-bullying laws. The Workplace Bullying Institute (WBI), a nonprofit dedicated to the eradication of workplace bullying, defines “workplace bullying” as repeated abusive mistreatment such as verbal abuse, threats, humiliation, work interference or sabotage. Herman also emphasized the importance of recognizing workplace bullying as addressing a problem different from traditional forms of harassment. According to a WBI national study, 35 percent of workers report bullying first-hand; 68 percent of bullying is same gender harassment; and bullying is four times more prevalent than illegal harassment.

The Healthy Workplace Bill has not been enacted in any state but has been proposed in 17 states, including California. Although not yet law in any state, Herman suggested nonprofits should still consider the detrimental effects of bullying in the workplace. Additionally, workplace bullying may be relevant to other actionable claims. For example, when the Indiana Supreme Court affirmed a $325,000 verdict in a suit alleging assault and intentional infliction emotional distress claims in the 2008 case, Raess v. Doescher, it stated that workplace bullying, although not an element of either claim, is a phrase “like other general terms used to characterize a person’s behavior, [that] is an entirely appropriate consideration in determining the issues before the jury” and furthermore “could ‘be considered a form of intentional infliction of emotional distress.’”

Herman also quickly noted other potential legal implications related to workplace bullying such as OSHA’s “general duty clause” to provide a safe environment, negligent hiring (e.g., knowing or should have known the hire was a bully), and negligent referral (e.g., failing to warn about known propensity for violence).


  • Establish written policies about appropriate workplace behavior.
  • Make prompt investigations of complaints.
  • Consider conflict resolution training.
  • Hold staff and volunteers accountable.
  • Use written records to track poor performance.
  • Make reference checks during the hiring process.
  • Have a clear process for giving referrals.

Resources on workplace bullying can be found on the Workplace Bullying Institute website and Healthy Workplace Bill website.

IRS Form 990

The IRS Form 990 is more than just an annual financial return. As Tenenbaum noted, the Form 990 has evolved from an accounting form read mainly by the IRS to a public relations tool (or nightmare) that is read by not only regulators but also the public, donors, media and even possible adversaries. Thus, while the Form 990 is still an important tool for the IRS regarding legal compliance, Tenenbaum emphasized that organizations should use the Form 990 proactively to tell a story, add details, and put the organization’s best foot forward.


  • Work towards being able to check “yes” to suggested policies and also take the opportunity to revisit current policies and revise as necessary.
  • Know the red flags for violations. For example, most automatic excess benefit transaction abuses are unwitting and unintentional.
  • Seek the help of appropriate, knowledgeable experts for nonprofits. Tenenbaum’s observation is that most auditors “don’t know what they don’t know.” For example, in his experience, not all auditors have been aware of the requirement for nonprofits to comply with the Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”) for fiscal years beginning after Dec. 15, 2006. FIN 48 applies to “uncertain tax positions” (i.e., a more than 50 percent chance that something is not properly characterized). Not only does this trigger certain requirements for the auditor, it also requires the nonprofit organization to check the FIN 48 field in Part IV on the Form 990 and complete Schedule D. (For more information, please visit the IRS website).

Copyrights and Trademarks

When handling copyright and trademark risks, Herman stated the biggest myths are:

  • Fair use as a defense against infringement applies broadly to all nonprofits.
  • If you attribute the source, it is not copyright infringement.
  • Organizations own the copyright to non-employee work if it pays for it.

First, being a nonprofit does not alone put the nonprofit’s use of others’ copyrighted work within the doctrine of “fair use.”  To determine fair use, the court looks to four factors: (1) purpose or character of use, (2) nature of copyrighted work, (3) amount and substantiality, and (4) effect on potential market.

Second, the rules surrounding the attribution of sources are not absolute. For example, Google was sued in 2005 by the Authors Guild for copyright infringement for its Google Books service (previously called Google Print) which copies portions of books with attribution to the authors. Tenenbaum also suggested being careful with buried pages (e.g., long hyperlinks) because the page might not have been intended for public consumption even though you stumbled upon it.

Third, there is a distinction between employees and non-employees when it comes to IP ownership. A simple explanation provided by Herman: for employees, if the organization pays for the work, then organization owns the copyright for the work; for non-employees, the organization does not own the copyright regardless if it pays for the work unless there is something in writing such as a work-for-hire agreement, copyright assignment, or license (i.e., permission to use).


  • Use “©[YEAR] by [Organization]” for an organization’s IP. (Note, © can be used even if the work has not been registered for a copyright.).
  • Consider registering certain published material by the organization. (This also makes it easier to prove infringement by others.).
  • Use work-for-hire agreements with independent contractors.
  • Establish standards for publications, both written and electronic (e.g., emphasize the importance to get permission).
  • Centralize responsibility for reviewing and publishing an organization’s work.
  • Be aware that some IP may be subject to more than one area of IP law (e.g., both trademark and copyright law).
  • Consider using rights dealers and other services that may be able to help you understand what permission you need such as the Copyright Clearance Center or American Society of Composers, Authors and Publishers (ASCAP).
  • *Note: Patents, another area of IP law, are generally very complicated and require the assistance of an expert such as an attorney.

Legal complications aside, perhaps the easiest consequence to understand is Herman’s statement that an organization simply does not want to be seen as one that violates others’ intellectual property.

Additional explanations, tips, and tools may be found in resources such as Purdue Online Writing Lab “Quoting, Paraphrasing and Summarizing,” Duke University Libraries “What & How to Cite,” and Plagiarism Checker.

Contracting Mistakes

Tenenbaum noted one of the most common mistakes with contracts deals with the concept of apparent authority.  For example, if a third party reasonably perceives an agent to have the authority to act on behalf of a principal (here, a nonprofit organization), the nonprofit organization will be bound to that contract even if that agent did not have such authority. See American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp.

Additionally, failing to properly document a contract can make conflicting interests difficult to manage. Most understand that each party’s basic goals are to minimize financial and liability risks, and maximize the benefits. However, contracts can vary widely and the terms often depend on circumstances such as the respective leverage of the parties. It is highly suggested for nonprofits to seek legal counsel, particularly for more difficult types of contracts such as technology or software development.


  • Confirm scope of authority with both those who have authority and those who do not have authority (e.g., outlining a two signature requirement for checks).
  • Have a contract signing policy.
  • Have model forms in your contract bank as a starting point (e.g., hiring agreement for independent contractors).
  • Look to model provisions.
  • Spell out expectations in the contract.
  • Plan for an exit strategy in the contract.
  • Avoid legalese when possible; contracts need to be understandable and clear.
  • Consider insurance options (generally no insurance for breach of contract but other options might be available such as event, employment, etc.).

Conflicts of Interest

Tenenbaum suggested the two biggest myths regarding conflicts of interest (COIs) are: (1) all COIs are bad for the organization and (2) disclosure of a COI is enough to remedy it.

There has been much emphasis in the sector that a written COI policy is a best practice. However, as Tenenbaum noted, simply having a COI policy is not enough, it needs to be an appropriate COI policy for your organization. Questions to ask include:

  • Is it too narrow?
  • It is too complicated?
  • Is it practical?
  • Does it address the common past problems of the organization?

While the IRS provides a sample COI policy, Tenenbaum emphasized it deals only with the IRS’s concerns about financial transactions. Other COIs such as decisions made in the interest of another organization may be just as important for some organizations.


  • Use examples to explain types of COIs.
  • Have a good process outlined, especially for key steps such as how to disclose a COI, determine whether it is in the best interest of the organization, and determine whether a transaction is a good deal for the organization.
  • Circulate and re-sign the COI policy each year.


Finally, Tenenbaum and Herman briefly touched upon insurance. When dealing with other parties, they strongly suggest against using an “in others we trust” or “hope and a prayer” risk management approach.


  • Be willing to talk about divergent interests.
  • Only agree to insure that which you have control over.
  • Don’t assume the other party’s insurance will cover you.
  • Get it in writing!

As Herman and Tenenbaum noted, legal risks can be especially difficult to understand because they touch multiple areas of law. However, that does not mean they are not manageable. Awareness and prevention are the keys; and nonprofits are encouraged to contact an attorney or appropriate legal expert when more assistance is needed.

This post is part of a four-part series on the BoardSource Leadership Forum 2010. Part I covers the opening plenary and “Politics and Budgets” session, and can be accessed here. Part III covers “Nonprofit Governance Challenges” and can be accessed here.

Although synchronicity problems between the board policy and practice were not addressed in this post, Herman suggested the book The Will to Govern Well by Glenn H. Tecker, Jean S. Frankel, and Paul D. Meyer for addressing such issues.

Venable LLP also has a library of free publications on nonprofit organizations and associations on a variety of legal topics on its website.


Not Just a Resume Booster: Tips for evaluating a nonprofit before joining the board of directors

Job Interview

Today is your lucky day. You received an offer to join a board of directors of a nonprofit and you readily accept. You cannot be more excited. It seems like a perfect fit. It has a mission you care about and you cannot help but think how great it will look on your resume. But you soon discover the position is not what you imagined. You are thrown onto the board without any orientation or training, the meetings are disorganized, the members are in uproar, and the organization’s paperwork from budgets to filings is a mess. Your dream volunteer job has quickly turned into a nightmare.

Unfortunately, situations like this are not uncommon. There is so much emphasis on director recruitment from a nonprofit’s perspective that we often forget director recruitment is a mutual selection process from beginning to end. Just as a nonprofit organization should not blindly accept any applicant as a director, an applicant should not blindly accept a director position without some understanding of the organization and his or her responsibilities. Both parties should be evaluating each other in order to mutually decide if it is a good fit.

Here are some tips for evaluating a nonprofit before joining the board:

Legal Compliance: Are you comfortable with the current state of affairs?

As a director of a nonprofit, a critical part of meeting your fiduciary duties is to ensure that the nonprofit is operating in compliance with the law. When it comes to legal compliance, you cannot judge a book by its cover. Here are a handful of documents that you should request and review as part of your due diligence.

  • Articles of Incorporation: Does it have unique provisions (e.g., describes the purpose with specificity or makes references to members)? Does it contain other limitations (e.g., assets may only be used towards the communities of San Francisco)? Does the organization adhere to these statements?
  • Bylaws: Is it written in understandable terms? Does it have contradicting or confusing provisions? Is this a membership corporation? Does anything stand out as inconsistent with how the organization actually operates? Do the internal governance policies make sense for this organization?
  • Conflict of Interest Policy: Who is required to sign the conflict of interest policy? What types of disclosures are required and are these satisfactory? Does it describe a reasonable and adequate procedure for handling potential conflicts of interest?
  • Form 990: Has the nonprofit made the required filing in previous years? What is the financial health of the nonprofit? Does the nonprofit use best practices by having non-required policies such as a conflict of interest policy?
  • Form 1023: What is the mission of the organization? What are its stated activities? Does it engage in lobbying activities? Is the nonprofit’s exemption application reflective of its current activities and pursued mission?
  • Current financial statements (audited, if available): What are the typical sources of funding? Does the organization provide executive compensation? How are the organization’s assets spent each year? Does it operate in the zone of insolvency?

Both Forms 990 and 1023 are required by law to be publicly disclosed. Websites such as GuideStar also simplify this task by posting filed Form 990s.

Additionally, some states provide online search tools for a quick snapshot of information. For example, in California, the Attorney General’s Registry of Charitable Trusts online search feature provides a nonprofit’s status regarding registration and other filing requirements.

These documents undeniably amount to a substantial volume of paperwork but a director’s job will entail review of such documents and more. Therefore, exposure to these documents early on in the process is actually good insight into some of your future job responsibilities as a director.

Relationships: Will you work successfully with others?

Volunteering at a nonprofit is that much more rewarding when you have good working relationships with those around you. A good working relationship is not necessarily one made of homogeneous personalities or views and that is void of any disagreement. In fact, nonprofits can greatly benefit from lively discussions and a board made up of different expertise, viewpoints, and other attributes. It is however important to get a sense of the type of people you will be working with in order to assess for yourself whether you will be a good fit for the organization.

A few ways to assess these potential working relationships are to:

  • Ask to attend a board meeting. Meetings can be telling about an organization and commitment, for example, by indicators such as an absence of an agenda or low attendance.
  • Meet the other board members. You may be able to get a sense about the personal dynamics, how you will fit in, and how they understand their roles.
  • Visit the nonprofit's location. Being present at the organization is a chance to observe the general organizational culture and people involved in its operations.

Another person to consider meeting or learning about is the Executive Director. The board and Executive Director have an intimate working relationship in running a nonprofit. An organization with a strong board and weak Executive Director may clue you in that either an ongoing task of the board has been to increase the Executive Director’s effectiveness and compensate for weaknesses, or even that a search for a new Executive Director is on the horizon. The situation of a weak board and strong Executive Director may suggest that part of your responsibilities as a board member will involve working on board development and improving the working relationship with the Executive Director or that the organization may need a change of board members in the near future.

Education: Will you have the tools necessary to succeed at this organization?

Incoming directors at an organization may have different educational needs for creating the right environment to thrive on the board. Factors such as past board experience or work experience in the nonprofit sector can be useful in quickly adapting to a director role and executing those responsibilities. Likewise, an organization’s investment in or opportunity for board development and mentorship may be an important factor of an ideal work environment for individuals who are first-time directors or new to the nonprofit sector. For those seeking board education, a few topics to consider are:

  • Orientation: What information will be covered? What are you expected to take away? What type of resources will be provided? Will you need more help or information after this?
  • Training programs: Are they offered? If so, do they address the skills and areas you need the most help with? Are they pre-scheduled or provided as needed? Will you need more training and education down the road?
  • Job description: What is being asked of you? Are your responsibilities and duties understandable and realistic? Can you fulfill this role?

Additionally, understanding the fiduciary duties of a director is critical to avoiding legal troubles. This type of overview may be especially important for an individual who is new to nonprofits and could benefit from an introduction to the nonprofit sector as well as key legal principles.

Indemnification & Insurance: Do you feel adequately protected?

An organization’s assurance to take reasonable steps to protect directors from personal liability is another important consideration when accepting a board position. Such steps typically include strong indemnification policies and adequate insurance. As Pamela Davis, president and CEO of the Nonprofits Insurance Alliance Group, explained in a Blue Avocado interview, "A Board Member’s Guide to Nonprofit Insurance,” lawsuits against nonprofits can range from slip and fall accidents to employment issues to professional errors. Therefore, eliminating risk entirely is impossible. Instead, as Davis explains, “for most nonprofits, the amount of insurance they buy relates to their specific situation, their insurance broker's assessment of their risk and the risk tolerance of their board of directors.” As a potential director, it is good to know beforehand what level of protection you will be afforded by the organization. Some considerations worth addressing include:

  • Indemnification: Does the nonprofit have an indemnification policy? Is the policy within the protection allowed by law? Does it significantly deviate from indemnification policies of other nonprofits to your detriment?
  • Director and Officer Insurance: Does the organization offer it? What types of claims does it cover? When does the coverage begin and end?
  • Other Insurance: What other types of insurance does the organization carry? Accident, property, etc.? Does this seem adequate for this specific nonprofit and the types of activities it engages in?

This list of tips is by no means comprehensive and is not to suggest any one of these factors should drive or deter your acceptance as a director of a nonprofit. A good starting point is to understand your responsibilities as a director and to ask yourself what risks you are concerned about. From there, you can take the appropriate steps to learn about those risks and actions that can be taken to mitigate those concerns.

BoardSource provides a useful list of questions to ask before joining a board from programs to finances in its “Q&A: What Should I Know Before Joining a Nonprofit Board?".