Tone at the Top - Questions to ask at Board Meetings

TONE AT THE TOP
Oversight by Inquiry: 25 Questions to Ask at Board Meetings
Robert P. Seestadt, CPA

©2009 Robert P. Seestadt All Rights Reserved - 2 -
Establishing “tone at the top” is a key
responsibility of nonprofit board members,
communicating the importance of oversight,
integrity, and strong internal controls to
management and staff

Table of Contents
What is “tone at the top”?.........................................................4
Using inquiry to gain insight…………………..………………………………..5
The management letter as oversight tool…………………………………12
Acknowledgements and more information………………………………13

TONE AT THE TOP
What is Tone at the Top?
In a nonprofit organization, the board has a significant responsibility for
ensuring that management has adequate internal controls in place. Although
the audit committee usually leads this effort, the board at large must actively
support it as well.
Internal control is often defined as a process, overseen by the board of
directors, management and others designed to assure that financial
statements are reliable, laws and regulations are in compliance, and
operations are running smoothly.
In this regard, the organization’s control environment is a key element of the
internal control structure. Control environment, often referred to as “tone at
the top” refers to the integrity and dedication that the board and
management convey to the entire organization’s internal control system.
Although tone at the top is a qualitative aspect of internal controls, it’s
importance should not be diminished. According to many professionals, tone
at the top is considered to be the fundamental control feature for an
organization, providing credence and value to all other internal control
elements.
As you will see throughout this document, simple curiosity, listening, and care
for the organization all contribute significantly to improving tone at the top.
These actions will also improve the overall board effectiveness on many other
fronts.
Robert P. Seestadt, CPA

TONE AT THE TOP
Using Inquiry to Gain Insight
The simple act of asking questions, either at board meetings or during one-
on-one sessions with the executive team, can be an effective way to
establish tone at the top. Below are some questions to consider asking to
gain insights as a board member. Ideally, these questions will be enable
open-ended responses from the management team, sometimes leading to
a more strategic discussion. If responses tend to be more “yes” and “no”,
consider asking in a more open-ended way.
1. WHAT SURPRISED YOU?
This simple question can facilitate a discussion about deviations from
organizational plan and changes in the economic environment. For example,
a response such as an unexpected dropoff in certain program revenues may
drive a discussion and further research on recent trends and red flags
2. How STRONG ARE OUR CASH RESERVES??
Many organizations lack adequate cash reserves, unable to withstand
revenue downturns in tough times. Organizations should develop short and
long-term cash projections to assess vulnerabilities.
Tip: Create a weekly roll-forward cash projection and update it regularly
(each month, etc)
3. HOW DO YOU ASSESS OUR UTILIZATION?
Nonprofit organizations have to maximize the number served based on their
current and planned capacity. Low utilization is an indicator of wasted

resources. Consistently high utilization can indicate the need for capital,
staffing or other investment to adequately serve organizational mission.
Tip: Ask management to measure organizational “utilization” by dividing
actual number served for the year by the maximum number that could have
been served based on organizational capacity. Discuss the outcomes and
compare to goals and expectations.
4. WHAT IF OUR BUILDING BURNS DOWN?
Insurance and data backup coverage should be reviewed periodically to
assure that if the worst case scenario occurs, the organization can withstand
the financial and information technology damage incurred.
Tip: Periodically test your data backup system as though your existing
hardware was destroyed
5. IS OUR BUDGET REALISTIC?
Nonprofit executives tend to look at the future with optimism. Board
members and management need to assure that this “glass half full” outlook
does not create unrealistic budget assumptions, making the organization
vulnerable if the “best case scenario” does not materialize.
6. HAVE WE REVIEWED OUR INSURANCE COVERAGE LATELY?
Things change. It’s always a good idea to keep your agent apprised of new
ventures, changes in the facility and operations of your nonprofit organzation
to make sure that coverage matches exposure.

7. HOW HAVE NEW IRS FORM 990 DISCLOSURE REQUIREMENTS AFFECTED US?
The IRS has recently overhauled the disclosure requirements in the annual
form 990. Organizations should make sure that they understand the
disclosure requirements and are consider the adoption of new policies as
deemed appropriate.
Tip: Ask your audit firm for a summary of the 990 changes
8. WHICH PROGRAMS GENERATE SURPLUSES? WHICH INCUR DEFICITS?
Over time, nonprofit organizations have a tendency to add and expand
programs without assessing their return on investment. Of course, not all
programs are intended to generate a “surplus”, but it is important for board
members and management to understand the extent of program
subsidization.
9. WHAT WOULD CAUSE US TO MISS OUR FINANCIAL PROJECTIONS?
By asking this question, a board member can navigate the root assumptions
used to assess the financial outlook of the organization. Sometimes, financial
projections are entirely reliant on one or two pending “asks” turning into
gifts. By understanding the architecture behind the financial assumptions,
vulnerabilities can be more accurately understood.
10.ARE ANY KEY PLEDGES LIKELY TO BECOME UNCOLLECTIBLE?
It’s not enough to secure funding commitments from donors – you have to
actually collect the funds as expected. This places nonprofit recipients in the
uncomfortable, but critical, role of collection agency for pledge payments
that linger beyond scheduled timeframes. Unfortunately, significant pledge
payment issues can affect the sustainability of nonprofit organizations.

11. ARE WE DEPENDENT ON A SMALL NUMBER OF FUNDING SOURCES?
Organizations that are reliant on a handful of large gifts and grants may be
vulnerable to cutbacks or changes in donor funding strategy. It’s best to
acknowledge the potential impact of such changes before they occur.
12.WHAT OPPORTUNITIES DO WE HAVE TO GROW REVENUE?
With so much focus on organizational challenges, the flipside of assessing
opportunities can be overlooked. During times of uncertainty and change,
organizations should focus more than ever on strategic growth opportunities
to drive revenue growth.
13.HOW CAN WE HELP?
Sometimes management is reluctant to seek help and guidance from board
members for various reasons. Sometimes simply offering a helping hand can
open the door to improving financial communication, planning and reporting.
14.HOW DO WE COMPARE TO OUR PEERS?
Benchmarking against successful organizations in your sector can lead to
ideas and actions for improvement, effectively raising the standards of
measurement for future success.
Tip: Reach out to peer organizations to see if they would be willing to share
data. Also consider using public databases such as Guidestar.org for
additional benchmarking data

15.WHAT ARE OUR CRITICAL SUCCESS FACTORS?
Sometimes it is helpful to narrow organization success to a few key
indicators, making it easier to convey whether the organization is on track or
falling short of goals.
16. DO WE HAVE WRITTEN FINANCIAL POLICIES AND PROCEDURES?
Policies and procedures provide the internal machinery to provide
consistent, reliable financial information. When procedures are not
documented and followed, the resulting financial reporting can be confusing
and chaotic.
17.HOW COULD FRAUD BE COMMITTED?
Brainstorming related to fraud risks can help a nonprofit organization
understand some of the key vulnerabilities inherent in the operation. By
understanding these vulnerabilities, board members can take a larger role in
their financial oversight responsibility by making sure adequate resources are
secured to prevent fraud in the future.
18.HAVE WE ADDRESSED ALL AUDIT MANAGEMENT LETTER RECOMMENDATIONS?
Auditors often prepare a letter of recommendations following the audit field
work each year. By receiving this letter and following up on its
implementation, board members will be engaged in the continuous
improvement of the finance function, while conveying a message to the
finance staff that the audit recommendations are important and should be
addressed.

19.WHAT ARE OUR MOST SIGNIFICANT SHORT-TERM CHALLENGES?
This question should provide good feedback regarding where the finance
staff believes the organization is headed. Hearing this straight from the
person responsible for the organization’s finances should provide a more
direct sense of whether the outlook is encouraging or frightening.
Tip: Ask the finance staff to prepare a brief monthly highlight narrative
summary of challenges. This may help focus the board on key agenda items
for discussion and resolution
20. HOW LONG DOES IT TAKE, ON AVERAGE, TO PAY OUR VENDORS?
This pragmatic, nuts and bolts question will help provide board members
with a gauge of cash sensitivity and concern. If the organization is taking 90+
days to pay its bills, liquidity may be a concern worth discussing.
21. ARE WE DELINQUENT ON ANY FILINGS?
Nonprofit organizations can have many filing requirements (IRS form 990,
state license to solicit, payroll tax and wage reporting, etc). Delinquent or
missed filings can cause significant penalties to accrue, while distracting the
organization from its mission.
22.WHICH EXPENSES ARE RUNNING OVER BUDGET AND WHY?
It is a good idea to understand the expense structure of an organization. By
understanding those expense line items that are consistently over budget,
you can build in a better planning process for future budgets. Also, the
information gleaned by asking about unfavorable expense variances will
likely drive conversation around the operational aspects of the nonprofit.

23.WHAT TOOLS AND RESOURCES DO YOU NEED?
Everyone has a wish list. For the finance department, the list may include
improved accounting and general ledger software, staff and capacity to
manage finances.
24.WHAT IS OUR PROCESS FOR BIDDING KEY SERVICES AND CONTRACTS?
Good expense management requires periodic bidding of services and
contracts. Many times, the process results in lower operating expenses.
Often times, existing vendors and suppliers will come to the table with a
better deal for the organization if they know that their work will be put out
to bid.
25. WHAT IS OUR PLAN “B”?
Things don’t always go as expected. Sometimes (hopefully temporarily) the
worst case financial scenario becomes a reality. It’s always a good idea to
know what actions need to take place to “weather the storm” during times
of trouble.

TONE AT THE TOP
Using the management letter as an oversight tool
What is a management letter?
Management letters are the written recommendations and concerns noted
by auditors following fieldwork. Sometimes management letter
items identify serious problems such as material weaknesses in internal
controls and sometimes they simply address areas for future improvement
such as upgrading general ledger software, etc. Simply put, management
letter recommendations can be viewed as a post-audit "to do" list for the
organization's accounting and finance function.
A management letter is one of the
tangible “products” that boards receive
following an audit
Why is it important to resolve management letter recommendations?
Results and findings following the audit are often communicated to
organization board members, banks, funders and grantors. The successful
resolution of management letter recommendations indicates a willingness
and ability to address key accounting, risk and internal control matters
beyond the audit opinion letter.
So, make sure to read and review all audit management letter
recommendations. Ask the executive team to update you on progress going
forward to assure recommendations are not forgotten. Of course,
sometimes the costs of implementing auditor recommendations outweigh
the costs. Many organizations perform a cost-benefit analysis of all
recommendations, documenting the preferred course of action and
communicating with both the board and auditors.

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