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Nonprofits Need Strong Conflict of Interest Programs

By Frank Grimaldi

“It takes many good deeds to build a good reputation, and only one bad one to lose it.”

Benjamin Franklin

The wisdom of Benjamin Franklin is as true today as it ever was. The reputation of even the most effective and successful nonprofit can be quickly undone by an act that casts suspicion on the integrity of the organization. A couple of major factors that affect the reputation of a nonprofit organization (NPO) are how efficiently funds are used, and the  dedication of its volunteers, board members and employees to the organization’s mission. Nothing will demolish a nonprofit’s reputation faster than a conflict of interest. In order to maintain trust with your stakeholders, it is crucial for your nonprofit to be aware of potential or actual conflicts of interests within your organization and how to manage them.  

Conflicts of interest can range from benign situations to corruption scandals. What makes conflicts of interest particularly tricky is that they are difficult to detect. In most cases, the only reason an organization uncovers a conflict of interest is that the conflicted person discloses it, or a whistleblower reports it. Given how difficult it is to detect conflicts of interest, how can an organization shield itself from them?

How to protect your organization from Conflict of Interest

The best way to deal with conflicts of interest is by establishing a conflict of interest program (COI). A COI program is a formal program specifying an organization’s policies, procedures, and actions designed to assist management prevent, detect, and remediate actual, apparent, and potential conflicts of interest. A well-designed COI program can help you and your board identify, avoid, and disclose conflicts of interest. It can also help your organization hold your volunteers, board and employees accountable, and manage conflicts that may exist.

Ingredients to a Great COI Program

A COI program consists of structural factors and functional factors. Think of structural factors as a blueprint; they lay out the structure of the COI program. The functional factors are the cultural elements of the COI program; they add the dimensions necessary to promulgate the purpose of the program. The factors of a COI program are as follows:

Structural factors

  • COI risk assessment - a structured process to identify and assess an organization’s risk of apparent and actual conflicts of interest based on multiple factors including the nature of the organization, the environment in which it operates, and the values of its volunteers, board and employees.
  • COI policy – a system of principles that define conflicts of interest. It communicates guidelines for conflict management and details punishments for failure to disclose.
  • COI training –  a training program that uses different formats (i.e. reading material, CPEs, & live seminars) to teach people in the organization about conflicts of interest and how to manage them.
  • Policy enforcement – the application of punishment(s) as described in COI policy for undisclosed conflicts.
  • Regular review and update - a review process that uses feedback to enhance the overall COI program.

Functional factors

  • Ethical culture - the cultivation of an ethical culture by establishing a healthy tone at the top and encouraging volunteers, employees and board members to disclose any conflicts.
  • Communications strategy – the use of multiple communication channels to communicate the organization’s goals, values, and expectations to anyone involved with the organization.
  • Internal controls - the use of outputs from the COI program to design controls that decrease the risk of conflicts, such as segregation of duties in areas of high risk.

The risk of conflicts of interest cannot be completely eliminated, but a well-designed COI program can help an organization establish effective measures to detect and prevent them. An organization with a COI program is significantly more likely to avoid, or at least mitigate, conflicts of interest that are harmful to the reputation and financial health of the organization.

NPOs are generally considered the schema of trustworthy and responsible organizations. Designing and implementing an effective COI program is one of the ways that NPOs can successfully reflect these expectations.

Frank Grimaldi is a staff auditor is Myers, Brettholtz & Company, PA. and a graduate of Florida Gulf Coast University

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