Conflict of Interest Policy: Financial Statements & Form 990

The latest view on not-for-profit accounting issues

On page 6 of the Form 990, the IRS asks the nonprofit organization if they have a written conflict of interest policy, if annual disclosure is required, and if the organization regularly monitors and enforces compliance with the policy. Often times when I ask the above question of my 990 clients, I get a response along the lines of, “is it required?” The answer is no, it is not required. However, it is a best practice for the organization.

The IRS asks this question to help them determine if the organization has proper oversight of funds that are received from the public. Board members have a duty of loyalty and should put their personal interest aside when making decisions on behalf of the organization. Having and maintaining a written conflict of interest policy and requiring annual disclosure will help protect the organization from any possible hidden motives that board members may have while making decisions on behalf of the organization. It will also help board members recognize when they have a personal interest and should handle any transactions differently.

It is acceptable to have conflicts of interest with a board member, but you must make them transparent so that the organization can handle the situation properly. For example, the organization may need to outsource a printing job and one of the board members may own a printing company. The organization should price shop other vendors to ensure they are making the best decision for the organization, and the owner of the printing company should not be allowed to vote on the decision due to the conflict of interest. Then if the rest of the board decides to use the board member’s printing company for the job, they must disclose the transaction on Schedule L of the Form 990 (and as a related party transaction in the financial statement footnotes if the organization has audited financial statements). As explained in the example above, implementing a conflict of interest policy at one’s organization can help to assist the board and maintain best practices at your organization.

By Michelle Housman