Good governance for tax exempt entities;
Report to the Board of Directors,
Havasu Foundation for Higher Education.

February 15, 2008
By Dr. Bill Ullery, HFHE Treasurer and Executive Director pro tem

As your HFHE Treasurer and Executive Director, and as a part of my end-of-year 2007 reports to the HFHE Board, please accept this third document.

Previously, I sent you the Excel spreadsheet on HFHE Donors 2004 through 2008, detailing every donation received by HFHE since its inception. Last week, I sent you the 2007 Financial P&L Statement.

As with monthly financial statements, this report should be formally reviewed and considered for approval by the Board, added to the website, and distributed to members via Constant-Contact email.

To help with this discussion, attached is a copy of a brochure by Eide Bailly, LLP, one of the nation’s top 25 CPA firms;  http://www.eidebailly.com/   This document deals with the process of good governance in helping provide assurances that non-profit entities operate with integrity. Included are the IRS recommended nine governance practices (in italics below) for organizations such as HFHE. http://www.irs.gov/charities/  

Following is my response for HFHE on each of the nine IRS recommended governance practices. If you wish, the Executive Committee could further discuss these nine points and consider additional areas of needed action, clarification, and improvement.

1.  Mission Statement
The mission statement should clearly articulate why the charity exists, what it hopes to accomplish, and what activities it will under­take, where and for whom. It serves as the key external message and is a way to attract potential donors and interested volunteers. The mission statement also serves as an internal guiding principle for the board and employees of any non-profit, focusing action, discussions and decision-making.

When the Executive Committee reviewed the HFHE By-Laws in July 2007, the mission statement was tightened, shortened, and subsequently displayed prominently on the Home page of our new website;  “Our mission is to develop a comprehensive
residential university in Lake Havasu City.”  http://www.havasufoundation.com/index.htm

Moreover, we have a webpage About Us section with links to the Articles of Incorporation and By-Laws. Thus, these documents are available for the inspection by HFHE’s nearly 1,800 members and the public at large. Both are important documents on what it is HFHE does and how it is organized.

2.  Code of Ethics & Whistleblower Policies
The non-profit’s code of ethics should describe behavior it wants to both encourage and discour­age. The board and the executive director must set the ethical tone for the entity. In addition, a whistleblower policy should be adopted for handling employee and volunteer complaints and procedures established for employees to report in confidence suspected improprieties or misuses of the charity’s resources.

The Board in January 2005 added a conflict of interest section to the By-Laws with sub-sections on Interested Persons, Financial Interest, Duties to Disclose, Conflict of Interest, Records of Proceedings, Compensation, and Annual Statements;  http://www.havasufoundation.com/bylaws.htm  

We also added to our website, phone numbers and email addresses and will be adding photos of all Board members, which gives our nearly 1,800 members and the public at large, ready access to their Board; http://www.havasufoundation.com/Board.htm    

The 2007 annual financial statement is now on the website; http://www.havasufoundation.com/about.htm   Included are the details of every expenditure during 2007.

Moreover, the Board received a copy of the Excel spreadsheet on exact amounts received from each donor by year. I have also put the abbreviated sheet (by levels only) on the website. Thus, donors can check their records against HFHE records. The details exactly match the HFHE accounting system. From the statistics of website usage, few site visitors click on such pages. But, providing such documents to donors allows them to verify their gift. Which in turn is fundamentally crucial to our reputation of total accountability, honesty, and care in managing the money of HFHE and the contributions of its donors.

Should a donor object to such specifics, we can delete data on the webpage. But, thus far, everybody has wanted the details on their personal donations to be 100% accurate. A more visible section of the website, Donor Recognition, provides donor amounts by general categories; http://www.havasufoundation.com/donor_register.htm   

3.  Due Diligence
Directors must exercise due diligence consistent with a duty of care that requires a director to act in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the director reasonably believes to be in the charity’s best interests. The duty of care is perhaps more accurately described as a “duty to be informed.”

HFHE By-Laws require good attendance and all Directors are in compliance. Moreover, given the number of emails floating around our Board with attachments and details about everything HFHE is doing, and given the involvement of the city with Ex Official Board members for liaison and communication, the city’s “Partners” group, the media coverage, the website, and the Constant-Contact email software, our Board and members are very well involved and informed.

4.  Duty of Loyalty
The duty of loyalty requires a director to act solely in the best interests of the non-profit organization, rather than in his or her own inter­ests, or those of his or her associates. The IRS suggests that every organization adopt a conflict of interest policy that is regularly evaluated. A conflicted director or key employee must not participate in any discussion, vote or decision regarding the transaction or expenditure in question unless the organization’s board determines that the director may participate.

The conflict of interest policy for Directors is in place and was reviewed in July 2007 by the Executive Committee and again by the Board in August 2007.  The Board has been very attentive to the process of conflict of interest and has yet to experience a problem in any action or financial transaction of HFHE.

5.  Transparency
Transparency is accomplished by making full and accurate information about the organization’s mission, activities and finances publicly available. Except for trade secrets, a non-profit should conduct itself in such a way that it would not be concerned about having anyone (the IRS, state regulators, donors or the press) come in to review the board minutes and other details of the organization’s operations.

This may be one of the most commonly violated principals of good governance for non-profits and painfully apparent in some other similar organizations in our community. For HFHE, full and accurate information about the organization’s mission, activities, and finances is easily available to the nearly 1,800 members and the public at large on the website. Every minutes of meeting of the Board since its inception is on the website; http://www.havasufoundation.com/minutes.htm   An FAQ section and the News page provides a huge amount of information on the organization and the key details of its activities relative to the mission. No other non-profit tax exempt organization in our town has done a better job in meeting their obligations of “transparency.”

6.  Fundraising Policy
Charitable fundraising is an important source of financial support for many charities. Success at fundraising requires care and honesty. Watchdog organizations require that non-profit’s total fundraising expenses be no more than 35 percent of related contributions from fundraising. Organizations should keep track of their fundraising ratio to determine any tax excess or inappropriate expenditures.

HFHE has a new fundraising committee that has organized its activities appropriately. The details of funds raised and expenditures are on the website. Given the success of December 2007 and January 2008, donors have great confidence in the organization, the ways funds are being used, and the objectives that have been so well articulated in the 2007 Budget, the 2007-2008 Strategic Plan, and during the 2008 Annual Meeting. While watchdog groups require total fundraising expenses of non-profits to be no more that 35 percent of related contributions from fundraising, HFHE’s fundraising expenses have been less than 1.0 percent mainly because of the work of volunteers, non-paid Directors and an Executive Director who serves pro bono. Very impressive! And, a statistic our members and the community at large can be proud of.

7.  Financial Audits
Directors must be good stewards of the charity’s financial resources. Any non-profit with significant financial resources should ensure an independent financial auditor conducts an annual audit. The organization may establish an audit or finance committee of independent directors, with at least one member possessing financial expertise.

HFHE has a degreed accountant processing all transactions and managing the accounting system provided pro bono by DBU Homes. HFHE also has the services of a local CPA, Barbara O’Connor, also bro bono by DBU Homes. The CPA does monthly, quarterly, and annual reviews of the accounting system, IRS reports, AZ Dept. of Revenue reports, AZ Corporate Commission filings.

As with the recent Annual P&L Statement and the Excel spreadsheet on 2004-2008 Donors, great detail on HFHE finances has been provided to each Board member.

With the recent growth in donations and with the addition of a new CPA Board member in Andy Campbell, we will have in 2008 and beyond, an opportunity for periodic financial system reviews by a second CPA.

As HFHE does not have “significant” financial resources, the costs of outside independent financial auditors to conduct an annual audit may not be appropriate. Andy Campbell and possibly one other Board member could be a standing committee of independent directors (independent of the current HFHE office with at least one member possessing financial expertise) and should be considered by the Board as the appropriate alternative on financial audits for smaller organizations.

Accordingly, I recommend an amendment to the HFHE By-Laws;

 14. Standing Committees:
Audit Committee – This committee will provide audit services to the Board consistent with IRS guidelines for Tax Exempt Entities.

8. Compensation Practices
A successful charity pays no more than reasonable compensation for services rendered. Non-profits should consider establishing a compensation committee of independent directors to determine and review compensation packages. Directors should generally not receive compensation except for expense reimbursement.

An independent oversight committee of independent directors for HFHE is likely not needed since no Directors receive compensation and the Executive Director serves pro bono. HFHE has only one part-time clerical employee at less than 10-15 hours per week. The By-Laws conflict of interest section properly deals with such compensation and HFHE is and always has been in compliance.

9.  Document Retention Policy
A charity should adopt a written policy establishing standards for document integrity, retention and destruction. The policy should include electronic records and should take into account relevant statutes of limitations that would likely apply to the organization and its activities.

Article 17 of the By-Laws; Books and Records: The Foundation shall keep, at its principal office for business, complete books and records of account and minutes of the proceedings of the Board of Directors. Such information may be made available to the public via the Foundation’s website at the discretion of the Executive Committee.

The HFHE office provided pro bono by DBU Homes includes computers, Internet connections, B&W and color printers, a high speed copier, a master server (computer w/ hard drive), and a second back-up hard drive which is removed from the premises each evening for security and fire protection, and other support services. The server has nearly every record ever produced by HFHE of any significance. Most Board officers have been diligent in providing the Executive Director with copies of important documents generated outside of the HFHE office. Periodically, the Executive Director has given Executive Committee members CD-R disks of the entire server file of HFHE documents including those of the accounting system.

This concludes the HFHE good governance report for tax exempt entities.