What is a conflict of interest? Simply put, it is a situation where someone in a position of authority in an entity – for-profit, nonprofit, or government – has the potential to act in a way that confers an inappropriate benefit to another person or organization, which action results in financial or reputational harm to the entity from which the benefit came. Managers and governors of organizations are held to a fiduciary standard that requires them to always act in the best interests of their own organization, even when such action may not be in their best personal interests or best interest of some other person or organization with which they are connected.

For example, suppose the manager of a nonprofit has a spouse who is the owner of a business. If it happens that the two organizations have business dealings with each other – for example, the business is the landlord of the nonprofit – each of the spouses must act in the best interests of his or her own organization without regard to how that action may affect their spouse or the other organization. The nonprofit manager cannot agree to pay inappropriately high rent to the spouse’s business, which would benefit the spouse, but would harm the nonprofit. Also laws and regulations surrounding tax-exempt status may impose penalties in such cases, both on the organization and on the person who approved an inappropriate payment, or in some cases prohibit such transactions entirely.

Ethical standards to which nonprofits, especially, should be held require adherence to that fiduciary standard. To ensure such adherence, every organization should have a formal, written conflict of interest policy which should include several elements. First, there should be a statement that employees, volunteers, and members of governing boards and committees will always adhere to that fiduciary standard. Persons involved in decision making should disclose any potential conflicts of interest and recuse themselves from voting on or otherwise influencing decisions affecting parties that pose personal conflicts of interest. Organization managers should be aware of potential organizational conflicts and act to avoid harming their own organization.

The written conflict of interest policy should be furnished to all persons upon becoming connected to the organization (new employees, volunteers and board members) and periodically to all continuing staff and board members. It may be desirable to have persons acknowledge in writing that they have read and understand the policy and will adhere to it. Then there should be a process for persons who become aware of a possible conflict of interest problem to report their concern (without fear of retaliation) to an appropriately high level individual in the organization. In serious cases this may be to the chair of the board, such as if the executive is the one with the conflict and he or she appears to be acting inappropriately.

Finally, there needs to be a process for identifying and documenting potential conflicts of interest. A best practice is to have each person in a decision-making position make a list of their personal and organizational relationships. Management should make a separate list of organizational relationships so that when decisions arise, it will be easy to consult a master list to see if there is an actual problem, and to judge how visible the problem would likely be to others. Such a list will probably be longer than one might at first think. Every person and organization has many relationships which might pose a conflict of interest. Also realize that the appearance of a conflict is just as serious an issue as an actual conflict, because outsiders who do not know the complete true situation often assume the worst.

About Blackman & Sloop CPAs, P.A.:

Blackman & Sloop is a full-service CPA firm headquartered in Chapel Hill, North Carolina and is actively involved in auditing, taxation, management consulting, financial planning, and related services. The firm directs a large part of its services toward providing management with advice on budgeting, forecasts, projections, financing decisions, financial analysis, and tax developments. The firm also performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns as well as technology consulting services regarding installation and training on QuickBooks. Blackman & Sloop provides services in Raleigh, Durham, Chapel Hill, RTP, Hillsborough, Pittsboro, Charlotte, and the rest of North Carolina. To find out more please visit http://www.blackmansloop.com

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*This article originally appeared in BDO USA, LLP’sNonprofit Standard Newsletter – Spring 2014“. Written by Richard Larkin, BDO CPA. Copyright © 2014 BDO USA, LLP. All rights reserved. http://www.bdo.com