The latest corporate scandals remind us that fraud can flourish when there is mismanagement or inappropriate safeguards and controls. When this happens, the financial livelihood of the company is threatened and we're left wondering how a seemingly well-run organization could let such a thing happen.

Nonprofit organizations are not immune to these difficulties, and we should be taking a look at our organizations' internal controls. One of the most important internal controls for any nonprofit organization is the conflict-of-interest policy.

This policy calls for employees and board members to disclose any interests they may have in companies doing business with the organization. Any contracts entered into with the related parties must be reviewed and approved by board members and officers not involved in the transactions.

Conflict-of-interest policies are important because a key principle of nonprofit status is the ban on private inurement of tax-exempt benefits to an individual person. Often referred to as “self-dealing,” the ban on private inurement mandates that individuals may not receive the benefits of a tax-exempt organization.

This may occur when a nonprofit conducts business with a firm or person related to an officer, board member or employee.

For example, if a nonprofit awards a lucrative consulting contract to an organization with which a board member is affiliated, the specter of “self-dealing” looms large. Even if the terms of such business are comparable to business conducted with organizations with whom there is no existing relationship, the hint of impropriety is problematic.

Nonprofit board and staff members are expected to act within the best interest of the organization, rather than in furtherance of personal interests or the interests of third parties. Self-dealing can result in bad publicity and may also jeopardize the nonprofit's tax-exempt status.

Nonprofit organizations are expected to be above reproach and meticulous in their financial accountability and should take steps to ensure that potential conflicts of interest are identified and avoided.

Adopting a conflict-of-interest policy is good business practice for all nonprofits. A definitive policy requires all board members, officers, staffers and volunteers who could influence a decision to disclose any self-interest they have in a transaction affecting the nonprofit.

The policy should identify the types of conduct or transactions that raise conflicts of interest concerns, should set forth procedures for disclosure of actual or potential conflicts, and should provide for review of individual transactions by the uninvolved members of the board of directors. Transactions that should generally be identified within the policy include the following:

• An ownership interest in a vendor from whom the nonprofit buys goods and services,
  
  

• An interest in property the nonprofit is buying or leasing — or thinking of buying or leasing,
  
  

• The possibility that an insider could personally gain at the nonprofit's expense, and
  
  

• Doing business with an insider's family or business partner.

--------------------------------------------------------------------------------
Betsy S. Nelson is executive director of The Association of Baltimore Area Grantmakers, a membership organization dedicated to promoting philanthropy. The Daily Record publishes Nelson's ‘Charitable Giving' column every other week. She can be contacted at 410-727-1205 or bnelson@abagmd.org.