Ethical lapses on the part of a nonprofit organization damage more than just the organization itself. The nonprofit in question may suffer immediately from bad press and a resulting decline in donors and volunteers who aren’t willing to contribute funds or labor to an organization they no longer trust. The effects can also spread across the entire nonprofit sector as the public loses its faith in the trustworthiness of nonprofits in general. And while ethical issues are perennially a problem, ethical lapses by nonprofits tend to increase during tough economic times. Protect your nonprofit organization by being aware of key ethical issues and having a plan to avoid them at best, or deal effectively with them at the worst.

Salaries and Perks

The purpose of a nonprofit is to do good by carrying out its mission – not to bestow lavish salaries and perks upon its executives and board members. While nobody objects to reasonable compensation for professional staff or reasonable reimbursement of expenses to other workers, the key here is “reasonable.” If a nonprofit’s core mission is not adequately funded, it should focus on fundraising and development activities to accomplish this. It should definitely not be thinking about giving bonuses to executives or outfitting the boardroom with expensive paneling and plush leather chairs.

Lack of Accountability

Accountability can encompass many aspects of an organization’s operations, but for nonprofits, the crucial matter is making sure funds go where they are supposed to go. With little oversight and many tax incentives built into the nonprofit model, it’s tempting to cut corners and borrow from one account to pay for another. Nonprofit organizations should make sure they have effective strategic plans in place to guide their budgeting and funding decisions, along with monitoring to ensure that financial transactions are properly tracked.

Financial Fraud

Nonprofits shouldn’t be in the business of monitoring their own financial status. It is too easy and sometimes too tempting to overlook inaccuracies, or even fraudulently alter the numbers. This kind of negligence is bad enough, and it can also mask more serious transgressions like embezzlement of the organization’s funds. Although it costs money, it’s essential to engage an independent auditor to regularly review the organization’s funding sources and expenditures. To ensure that appropriate monitoring is done, this kind of auditing should be given priority when the nonprofit develops its administrative budget.

Tax Evasion

Considerable responsibility comes with the tax-exempt status granted to nonprofit organizations. The nonprofit must adhere to its stated purpose when allocating funds, and refrain from promoting political candidates or points of view – which is illegal. Unrelated business income must be properly reported and taxes paid on any income directed to activities that aren’t related to the nonprofit’s mission.

Conflicts of Interest

Conflicting interests can arise in a number of areas in nonprofit organizations. It might be tempting to award significant contracts to a major donor or board member, for example, but doing this sets the organization up to act in the best interest of the donor, not the nonprofit or its mission. Another form of conflict of interest involves what’s known as tainted money, or accepting donations from sources that directly work against the nonprofit’s mission. For example, a nonprofit involved in environmental issues and saving endangered species should think twice about accepting a donation from a known major polluter.

Solving Ethical Issues

Protecting your nonprofit from the fallout of ethical issues involves prevention, monitoring and response when needed. Of these, prevention is the most important. Have a clear statement of ethics and require all employees, volunteers and board members to undergo ethics training at least annually to give your organization a foundation for conducting its affairs ethically. Then you will need to focus on regular review and monitoring to ensure compliance. Finally, every nonprofit should have a plan in advance for investigating, responding to and correcting the hopefully few ethical lapses that might occur.