Guide-for-Nonprofit-Organizations-Bankruptcy-Issues-FINAL-with-ads

In a financial crisis, the board must obtain and understand sufficient information to furtherdirect the staff to produce additional information where the information presented to the boardis insufficient to make well-considered decisions about the entity’s present and future. Amongthe financial product that the board must obtain and review – as quickly as possible – are theentity’s most recent annual budget, monthly and quarterly financial statements, and tax returns.The board will likely have seen and reviewed most of this, and perhaps all of it, on a regularbasis, but absent a crisis, may have done so with a less-than-critical eye, relying heavily onmanagement to note issues of concern. Now, the board is forced to look under the hood.As mentioned previously, when taking a closer look, the board may find that the entity’sfinancial records are not sufficiently detailed or sufficiently accurate to make a rational decisionabout the path to take. Furthermore, finding that the entity has been operating in anatmosphere of financial illiteracy raises significant issues with respect to its past and currentfinancial reporting to taxing authorities, lenders, regulatory agencies, and donors. No boardchair looks forward to that first conversation with his analog at the nonprofit largestinstitutional donor in which he conveys the message that ―We are in financial trouble but wecan’t figure out why.‖ Furthermore, the loans and grants made to a nonprofit typically comewith reporting obligations not found in the for-profit sector. Governmental loan and majordonor grant programs can require monthly reports that consume many hours of staff time toprepare. Discovery that past reporting may have been based on inaccurate data may lead to anobligation to file amended reports covering months or years. Prior years Form 990’s may alsohave to be amended. Adding to these burdens, all of this will need to be reported to the stateAttorney General’s office, which can lead to a summary investigation aimed at determiningwhether the entity’s charitable status should be revoked.For all of these reasons, a nonprofit board faced with sudden knowledge that the financialsituation is both grim and opaque must consider directing the entity to hire an independentfinancial consultant to rehabilitate the corporate financial records, and independent legalcounsel to advise it in connection with its anticipated communications with constituents,lenders, donors, regulatory agencies, and the Attorney General.Existing ManagementIt is the unfortunate lot of the board chair and the board to be faced with the possibility that theexecutive director that brought the news of crisis to you may be a part of the problem. Assumethat the crisis is fueled by, or at least has exposed, the nonprofit’s failure to adequately reservefor and pay its payroll tax obligations. The board must seriously consider whether theexecutive director and other existing management (e.g., chief financial officer and/or controller)should be retained at least while navigating through the crisis, or whether new management isnecessary. To some degree, this decision may be driven by the outcome of the awkwardcommunications that the board chair is about to have with its key grantors and stakeholders.Where existing management may be an issue but removing them would prove operationallyimpractical in the near term, the board may consider engaging the services of a turnaroundspecialist as additional management (a ―chief restructuring officer‖) who will function in part asan internal watchdog on the activities of existing management. The decision to remove any ofexisting management can then be deferred until the crisis has passed.10