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5 Principles to Avoid Conflicts of Interest

When an organization seeks IRS approval to be a tax-exempt organization the IRS asks specific questions regarding the existence and adoption of a conflict of interest policy.  Each year when the organization files the Form 990 again the IRS wants to know if a written conflict of interest policy exists and more specifically how is the policy monitored and enforced.  Just because you have a policy, you still need ongoing attention to monitor compliance with potential, perceived, or material conflicts of interest. Conflicts are often unavoidable, and not always unethical or illegal. Because you must annually disclose transactions with directors, officers, key employees, or others, here are 5 principles to help you deal with and properly disclose information:

  1. Periodically review your conflict of interest policy. Three elements to include: 1) how the policy is communicated and enforced, 2) guidelines for addressing conflict situations, 3) annual disclosure form for directors, officers, key employees
  2. Board members must agree to set aside personal or professional interests for the good of the organization. Such a requirement is not just about ethics, it’s a fiduciary duty (loyalty) for board members.
  3. If a board member has a material conflict, that person must not participate in discussions or votes related to the conflict.
  4. Periodically use board meeting time to discuss and brainstorm potential conflicts of interest. For example, financial conflicts, supervising family members, and soliciting the same donor for two different organizations. You want to be proactive about upcoming conflicts and deal with them before there is an issue. Discussion may also include conflicts of interest in the news, or situations your organization dealt with in the past and how they were resolved. Using board meeting time ensures that exploration and discussion are included in the minutes.
  5. Remember that transactions with former directors, officers, and key employees are included in the requirement for transparency on Form 990.

Although not required by the Form 990, many organizations create and adopt a code of ethics that sets guidelines for ethical standards. Such a document defines an organization’s beliefs, values, and expected code of conduct for all board members, officers, and employees of the organization.

Salmon Sims Thomas specializes in tax, audit, and consulting services for nonprofit organizations. Please contact us if your organization needs the help of a qualified accountant.