Not-for-Profit Ethics

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Avoiding Challenges to an Organization's Integrity Not-for-Profit Ethics

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Not-for-Profit Ethics Learning objectives

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Ethics Trends: The good news! Source: Ethics Resource Center, National Business Ethics Survey2/4/2014

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Ethics Trends: The not-so-good news 60% of the ethical violations employees observed were done by someone with managerial authority. 21% of respondents said they suffered from retribution as a result of reporting misconduct at their organization, just below the 22% who said the same in 2011 and much more than the 12% in 2007. Source: Ethics Resource Center, National Business Ethics Survey, 2/4/2014

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Ethics Trends: More not-so-good news Only 63% of employees in the survey said they shared the misconduct they observed. When they do report misdeeds, employees overwhelmingly turn to their direct supervisor (82%), far more than to senior management (52%), ethics officers (15%), hotlines (16%) or external government regulators (9%). Source: Ethics Resource Center, National Business Ethics Survey, 2/4/2014

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Ethics Trends: More not-so-good news Workers rarely turn to external parties to report misconduct, and just 14% of those who do said they were motivated by the possible money they would receive. Source: Ethics Resource Center, National Business Ethics Survey, 2/4/2014

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Ethics and Not-for-Profits The public holds nonprofits to higher ethical standards than government or businesses. Unethical behavior remains a persistent problem in NFPs and for-profits alike. Over 25% of Americans report having “a lot” of confidence in charitable organizations compared to 9 percent for government and 7 percent for major corporations. Do nonprofits deserve that confidence?

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Ethics and Not-for-Profits Nonprofits enjoy special tax exemptions that promote the idea of a public trust. Your stakeholders entrust to you the responsibility of running your organization successfully, sensibly and ethically. Boards and management must demonstrate that their programs/services are effective at accomplishing their mission and run prudently and honestly.

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Ethics and Not-for-Profits Recent Headlines

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Wide range of ethical challenges Some can result in criminal violations or civil liability: Most involve gray areas - activities on the fringes of fraud, or that involve conflicts of interest, misallocation of resources, or inadequate accountability and transparency.

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Ethical challenges in the NFP sector

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Ethics challenges in the NFP sector: Salaries that are modest by business standards can cause outrage in the nonprofit sector, particularly when the organization is struggling. Officers and unpaid board members may feel entitled to take perks because their services would be worth so much more in the private sector. Staff and volunteers may receive unearned benefits. Compensation

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Ethics challenges in the NFP sector: Common in the NFP sector Preferential treatment to board members or their affiliated companies, employees, major donors or other related parties Conflicts of interest

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Ethics challenges in the NFP sector: In a recent survey, 20% of NFPs (and 40% of those with more than $10 million in annual expenses) reported buying or renting goods, services, or property from a board member or a company affiliated with a board member within the prior two years. In 75% of NFPs that did not report any such transactions, board members were not required to disclose financial interests in entities doing business with the organization. Conflicts of interest

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Ethics challenges in the NFP sector: Many nonprofits oppose restrictions because they rely on insiders to provide donations or goods and services at below-market rates. Quid pro quo relationships can jeopardize an organization’s reputation for fairness and integrity in its financial dealings. NFPs need detailed, unambiguous conflict of interest policies, including requirements that employees and board members disclose all financial interest in companies that may engage in transactions with the organization. Conflicts of interest

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Ethics challenges in the NFP sector: Common limitations on gifts: Conflicts of interest

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Ethics challenges in the NFP sector: Under the revised procurement standards in the OMB reforms passed in December 2013, recipients of Federal awards must maintain written standards of conduct covering conflicts of interest and governing the performance of its employees engaged in the selection, award, and administration of contracts. Conflicts of interest

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Ethics challenges in the NFP sector: Nonprofits must have candor and accuracy in their public reports. Nonprofits need to pay particular attention to transparency, including in solicitation materials, grant proposals, and donor agreements. Publications and solicitation

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Ethics challenges in the NFP sector: To increase trust, organizations need to share with the public information about their agencies. Be transparent. The more information you share with the public, the more you are apt to be considered accountable. Solicitations should give the donor a full explanation of the use of the potential gift. Planned gift solicitations should suggest donors seek independent counsel whenever they are considering a planned gift. Publications and solicitation

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Ethics challenges in the NFP sector: Nonprofits face ethical dilemmas in deciding whether to accept donations that have any unpalatable associations or conditions. Gift acceptance policies should also state that gifts that are counter to or beyond the scope of the nonprofit's mission and purpose will be rejected. Ignore the saying "Never look a gift horse in the mouth"… Look in that horse's mouth. Financial integrity

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Ethics challenges in the NFP sector: Organizations may want to ensure that their financial portfolio is consistent with their values - investing in ventures that further an organization’s mission, or at least avoiding investments in companies whose activities undermine that mission. Investment policies

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Ethics challenges in the NFP sector: Not-for-profits serve crucial public functions and enjoy substantial public subsidies (in the form of tax deductions and exemptions); therefore, this public role also entails significant public responsibilities. Fiduciary obligations to stakeholders to use resources in a principled way. Money held in public trust should be well spent, not just well-intentioned. Accountability and strategic management

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Promoting ethical decision making: Ensure effective codes of conduct and compliance programs Codified rules can clarify expectations, establish consistent standards, and project a responsible public image. However, the existence of an ethical code does not itself increase the likelihood of ethical conduct. Much depends on how standards are developed, perceived, and integrated into workplace functions

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Promoting ethical decision making: Ensure effective codes of conduct and compliance programs The purpose of adopting a formal statement is to provide employees, volunteers, and board members with guidelines for making ethical choices and to ensure that there is accountability for those choices. All not-for-profits should formalize an appropriate "statement of values" or "code of ethics." Many organizations post their statement of values/code on their websites.

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Promoting ethical decision making: Institutionalize an ethical culture Source: National Nonprofit Ethics Survey, the Ethics Resource Center

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Ethics from a Board Perspective Good intentions are not enough to fulfill a board member’s ethical obligations to the board and to shield the organization, board and individual board members against possible legal action and reputational harm. Regulatory efforts are not making the challenge any easier. Board members generally serve without compensation and dedicate considerable amounts of time. But those who serve must exercise high ethical standards or face financial, reputational and legal threats to their organizations and, potentially, themselves.

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Ethics from a Board Perspective Ethical obligations of boards arise from state laws, charitable registration regulations, accreditation bodies, and many other sources. Ethical issues that arise for boards are similar from state to state (ex. conflict of interest). Some state ethics laws have been tightened to increase ethical expectations and reduce the window for potential self-dealing by board members.

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Ethics from a Board Perspective IRS requirements can expose board members who approve a questionable financial transaction, such as excessive benefits to the CEO, for instance, to large fines. Another common concern has been "do-little" board members who fail to attend meetings, read board materials, and prepare to conduct board business. Sometimes, the concern is the opposite, with board members overplaying their role and dominating others on the board into agreeing with their viewpoint.

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Ethics from a Board Perspective Boards may be subject to the tyranny of the executive committee, with the full board being reduced to a rubber stamp. Board members should not abstain or not show up, if they believe the board is making a mistake. Dissent could be a defense in any legal proceeding against the board. Term limits should be strongly considered.

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Ethics from a Board Perspective Interested in learning more about NFP ethics from a board perspective? Register now for Grant Thornton's upcoming webcast! Not-for-profit ethics: The board member perspective Register Now

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Connect with our knowledgeable professionals. Scott Steffens Audit Partner Grant Thornton Chicago Not-for-Profit Practice scott.steffens@us.gt.com 312.602.8140 Tom Brean Audit Partner Grant Thornton Chicago Not-for-Profit Practice tom.brean@us.gt.com 312 602 8711