This example illustrates the limits with directors' reliance on committee reports and professional reports. Some of the issues are reviewed at Discussion.
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Volunteer Legal Handbook
Example: "The Accountants Say We're Okay"
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This example illustrates the limits with directors' reliance on committee reports and professional reports. Some of the issues are reviewed at Discussion. |
Example
Barbara: The accountants have finished the audit.
Jim: That's great. What did they say?
Barbara: I've got the report right here. I'm not quite sure what all of it means but the numbers balance.
Jim: What's this line called "unexplained transfers" mean?
Barbara: I'm not sure.
Jim: Well, what about this line called "unfunded vacation accrual?"
Barbara: I'm not sure about that one, either. But no one was on vacation when the accountants were here.
Jim: Let's call the accountants and see if they can explain.
Barbara: There's a problem there. The accountants say that they incurred extra expenses because our books and records weren't in good shape, and they say we owe them $5,000 in addition to their original bid.
Jim: But their original bid was only $2,500.
Barbara: That's what I told them.
Jim: Did the accountants give us any explanation at all of what this report means?
Barbara: They wrote us a letter, but the letter has things all wrong. We need to get it corrected before we show it to the board.
As a threshhold issue, members of the boards of directors are entitled to rely on reports of committees and experts, where the reliance is reasonable. Where the directors don't understand the reports, it is impossible to reasonably rely upon the.
A second problem shown here involves the delivery of information to directors. Directors are simply forbidden to conceal information from each other; they have an absolute right to access to information. The failure to provide information is a grave breach of the duty of care owed by a director to the nonprofit corporation and other directors.
A third problem shown involves the issues involved in hiring professionals. Professional service contracts involve specialized terms and descriptions. You must understand those specialized terms. When an auditing firm, as a part of its contract with your nonprofit corporation, tells you it assumes your books and records have been kept in accordance with accepted accounting practices, you need to understand what that means, whether it is true for your organization, and the consequences of it being untrue. To fail to take those steps may be a breach of the director's duty of care.
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