Board of Directors – Financial Oversight
Posted by Dr. Earl R. Smith II in Governance, tags: adviser, advisory board, angel investor, board of directors, CEO, chairman, coaching, consulting, director, earl r smith ii, earl smith, Executive Coaching, federal circle, federal contracting, funding, Governance, government contractor, investing, investment, investor, Leadership, leadership assessment, leadership coaching, leadership development, leadership styles, management assessment, managing partner, Personal Growth, the federal circle, turnaround, Turnaround Management, Venture CapitalDr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
One of the more challenging roles that a Board of Directors faces is providing oversight of an organization’s finances. Business organizations – both nonprofits and for-profits – need the trust of their customers, creditors and suppliers. Nonprofit organizations must also have the trust of their donors to survive. When asked to join a board a highly successful businessperson is unlikely to join if the organization has a reputation for not being fiscally responsible.
Chief executives pay special attention to financial matters. Often Boards one ore more members with talents and expertise in accounting, banking and investment areas. Chief executives charged with fundraising or carrying out the day-to-day operations often do not have either the experience or bandwidth to understand the complex and fluid nature of modern accounting and investment practices.
The Sarbanes-Oxley Act (SOX), although generally not applicable to nonprofits or privately help companies, established practices that have been never the less adopted by of these organizations. Most times this has resulted in the establishment of finance and audit committees. The finance committee generally establishes the budget and authorizes major expenditures and focuses on plans to arrange adequate financial resources. The audit committee ensures compliance with generally accepted accounting practices. Companies engage the services of accountants and auditors on a monthly basis rather than just at tax time. By using a combination of an accountant and the finance and audit committee, chief executives free more time to devote to the mission of the organization.
Financial oversight involves more than guarding against fraud or misappropriation of funds. Tax laws and regulations such as SOX are very complex. Chief Executives, by nature are generally not tax or regulatory specialists. For example, one area of SOX applies equally to for-profits and nonprofits in the areas of document retention and whistle-blowers.
Boards must also work to ensure a company has adequate cash flow to support operations. Accountants can assist with establishing budgets and proforma cash-flow statements to guide a company in planning for daily activities. Boards can authorize the selling of accounts receivables and inventories to local lending institutions to generate additional cash flow when necessary. Directors are often very conservative by nature and prefer to stay clear of messy financial situations. SOX, has made many directors abstain from financial practices once thought to be routine. Chief Executives working for conservative boards must bring in financial professionals and tax specialist to work with finance and audit committees. This level of comfort aids the CEO by speeding the process along, and gives comfort and confidence to the board by having expert, professional advice on complex financial matters.
Financial matters are complex, and worrisome especially in the era of the Sarbanes-Oxley Act. Most boards of non-profit organizations and privately held corporations are taking these regulations seriously. Individuals invited to join a board are often hesitant when it becomes clear that the company is not abiding by them. Liability calculations may cause many good candidates to refuse to serve.
Boards are wise to use professional services to ensure financial statements are accurate, and contracts comply with tax law and Securities and Exchange Commission rules. The Chairman of the Board should ensure Board members are comfortable with all financial arrangements and that mitigates their liability through compliance. Professional advice is a good way for Chief Executives who are not tax specialist to protect directors, and allows the company to proceed with day-to-day business operations. Boards should adopt protocols that allow the company to operate in a transparent fashion to bolster confidence in their financial stewardship.
© Dr. Earl R. Smith II
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Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.
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