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Resolving Conflicts of Interest

By Prakash Rajan, CMA, CPA, CGMA, ACA
December 1, 2020
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Not-for-profit organizations aren’t immune from conflicts of interest, and accounting and finance professionals must stay vigilant to deal with such ethical breaches.

 

When a person of authority has the ability to make a decision in his or her official capacity in which the personal benefits could take precedence over the ostensible organizational benefits, that’s a conflict of interest. In other words, these are situations where the best interests of an organization are at risk of being compromised by the financial interests of a trusted individual vested with responsibility. As such, these situations could adversely impact persons holding positions of authority in carrying out their fiduciary duty.

 

Not-for-profit organizations are dependent on donors and accountable to the public for their survival and sustenance. Conflict-of-interest situations are a very delicate but important issue because a vast majority of not-for-profit organizations depend on the leadership of professionals who are either subject-matter experts or have connections and influence to promote the charities’ worthy causes. Decision making entrusted to professionals to raise funds and promote the causes of these organizations should be conflict-free.

 

PUBLIC PERCEPTION

 

A doubt in the minds of the public on any matters related to a potential conflict of interest could fuel a negative perception and hinder the growth and progress of any entity, especially that of a not-for-profit organization that’s dependent on public support. Nongovernmental organizations (NGOs), a category which most not-for-profit organizations fall under, had the best trust and credibility rating among the four constituents of business, government, NGOs, and media per the Edelman Trust Barometer 2020 report. That said, such trust has been waning in the past few years due to the public’s declining confidence in not-for-profit organizations. The cause for such decline has been all too many not-for-profit organizations either failing to properly vet and recognize conflict-of-interest situations or making poor organizational decisions.

 

Over the past few decades, news outlets have abounded with stories of scandals, including ethics breaches committed by persons of authority in not-for-profit organizations, notably the notorious fraud committed by the president of United Way in the mid-1990s. This has exacerbated people’s mistrust. Watchdog organizations as well as government and regulatory bodies around the world are aggressively monitoring the governance practices of nonprofit organizations for any hint of abuse of trust or misconduct.

 

The Association of Certified Fraud Examiners’ Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse estimates that not-for-profit organizations sustained a median loss of $75,000 and an average loss of $639,000 due to fraud. Susceptibility to fraud arises from organizations placing executive control in their founder, subject-matter experts, or substantial contributors who have little or no experience in internal controls and financial oversight. Conflicts of interest where board members or senior executives have hidden investments or other interests in vendors, service providers, or partners is one of the primary causes of fraud perpetration in nonprofit organizations.

 

Conflicts of interest have become all too common these days. Unfortunately, it’s inherent in the ordinary course of operations of many not-for-profit organizations. As such, it’s very important for these organizations to have guidelines, rules, policies, implementation standards, and monitoring mechanisms to mitigate the risk of bias and poor judgment stemming from conflict-of-interest situations. These will help to protect their reputation and credibility and ultimately boost public trust in these organizations.

 

MITIGATE RISKS

 

So, let’s examine the ways by which a not-for-profit organization can mitigate conflict-of-interest risk. First of all, formulate a detailed conflict-of-interest policy, which is an essential document for a not-for-profit organization. In the United States, for instance, the Internal Revenue Service requires all not-for-profit organizations to have a written conflict-of-interest policy and to acknowledge it in their annual tax returns. Further, an explanation of how the organization monitors this policy should also be included.

 

Apart from defining what types of transactions, holdings, and decision making constitute a conflict of interest, such policies should also:

 

  • Contain procedures for making decisions on transactions that may have potential conflicts of interest;
  • Require persons with a conflict of interest to make full disclosure of the actual or perceived conflict of interest;
  • Require persons making such disclosure to recuse themselves from the discussion of the transaction that caused the conflict and the decision in question;
  • Require keeping all meeting minutes to document discussions of agenda items with conflicts of interest, noting which voting members were present and indicating their final decision;
  • Require signed annual affirmation of compliance with the organization’s conflict-of-interest policy by all persons with authority; and
  • Create statements of consequences for not complying with the above.

 

It’s a best practice to provide training on conflicts of interest and create awareness of this important topic. In addition, revisit the conflict-of-interest policy periodically to amend its provisions commensurate with the changing circumstances. It’s also important to create a culture of candor where personnel feel comfortable expressing themselves confidently and revealing conflicts of interest without any fear of repercussions.

 

Integrity is one of the standards mandated by the IMA Statement of Ethical Professional Practice, which requires that IMA® members “mitigate actual conflicts of interest,” “regularly communicate with business associates to avoid apparent conflicts of interest,” and “advise all parties of any potential conflicts of interest.”

 

IMA ETHICS HELPLINE

 

For clarification of how the IMA Statement of Ethical Professional Practice applies to your ethical dilemma, contact the IMA Ethics Helpline.

 

In the U.S. or Canada, dial (800) 245-1383. In other countries, dial the AT&T USA Direct Access Number from www.usa.att.com/traveler/index.jsp, then the above number.

 

The IMA Helpline is designed to provide clarification of provisions in the IMA Statement of Ethical Professional Practice, which contains suggestions on how to resolve ethical conflicts. The helpline cannot be considered a hotline to report specific suspected ethical violations.

 

Prakash Rajan, CMA, CPA, CGMA, ACA, is the director of internal audit and chief audit executive at Kraton Corporation and a member of the IMA Committee on Ethics. You can reach him at prakashgrajan@hotmail.com.
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