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Although it may not be the first thing in the CEO's job description, protecting an association's assets is a primary responsibility of every association leader. But experts agree that, even in the smallest nonprofit organization, the weight of an organization's financial security should not rest on the CEO alone. Internal operating procedures, bylaws, job descriptions, and staff policies should ensure that the organization is protected against fraud and theft in its daily operations. And, ideally, an executive committee of the board, a contracted CPA or on-staff chief financial officer (CFO), and an investment manager or consultant should share the decision making about investments.

DAILY OPERATIONS AND INTERNAL POLICIES A strong internal fiscal plan includes things that may sound like common sense but can be overlooked if an association fails to focus on the possibility of threat from within. Associations must practice standard internal accounting controls and be sure they are written into bylaws, job descriptions, and policy manuals, says Ed Braly, accounting manager at the U.S. Chamber of Commerce in Washington, D.C. These include counter-signature requirements on checks, expense coding on all invoices, and bonding for all employees who handle cash. Bylaws should require periodic reviews and an annual audit by an independent auditor hired by and reporting to the board.

A review differs from an audit in depth of investigation. Reviews check to see that everything appears to be in order but exercise less due diligence than a full-scope audit, says Eric Cauble, a certified public accountant and senior vice president and CFO of the Medical Group Management Association (MGMA), based in Englewood, Colorado. Reviews are useful but the annual audit helps the executive director and CFO-or a contracted CPA if the association is too small to have a CFO-examine the organization's practices. Annual audits more thoroughly examine accounting records, policies, and procedures and even ascertain the association's adherence to its own standards. A full-scope audit should include what's called a "management letter," in which auditors suggest improvements to internal controls and accounting practices.

As a matter of policy, Cauble believes, auditors should present the audit report and management letter to the governing body-whether it is a finance committee appointed by the board of directors or the executive committee of the board-in a face-to-face meeting, followed by a closed session that excludes paid staff, possibly even the CEO. This session should be established in the bylaws as routine, he says, so neither the auditor nor the board is put in the awkward situation of having to request a closed session.

An association should keep a constant eye on where its money is going. Timely reconciliation of financial statements may be overlooked during annual meetings, legislative sessions, or other distractions. But all income statements and balance sheets must be reviewed at least monthly and actual expenditures consistently compared to budgets, says Michele Singer Ross, senior vice president and manager of the Tax-Exempt Group for First Union National Bank in Washington, D.C. She recommends a periodic trend analysis of line items, comparing revenues and expenses to not only the previous year but four or five years past. "Sometimes you're unaware of how much a line item has grown relative to the total footings until you look back and realize the big difference over time," Ross says.

Banks work in cooperation with associations to protect against internal and external check fraud. A "positive pay" order is a simple, proactive way to ensure that only legitimate checks are cashed against the association's account, and it can be done electronically, Ross says. The association simply provides a payables file with check numbers and amounts to the bank when checks are cut. Such safeguards allow the bank and the association, as well as law enforcement agencies, to act quickly to detect criminal activity that can threaten the organization's resources and integrity.

RESERVE FUNDS AND INVESTMENT STRATEGIES

While there is no fixed amount a nonprofit association must have in operating reserves, a rule-of-thumb minimum is six months' expenses. Whatever the target amount set by the governing board, the reserves fund should be sufficient to allow the organization to operate through a crisis and get recovery plans in place. Braly says a comfortable goal for most associations is a year's expenses, but the amount depends on the organization's revenue base and cycles that some industries experience.

Ross thinks two years' expenses is ideal but admits the numbers will vary. "You obviously wouldn't expect an association with $50 million in annual revenues to have $ioo million in reserves," she says. Ross cautions against zero-based budgeting. "Prudent associations will build a surplus into their budgets and plan to put those dollars into operating reserves," she says. "The necessity of this discipline has been experienced by many associations affected by the impact of September ii on the meeting and travel industries."

James Meek, a certified investment management analyst, is first vice president, investments, for Legg Mason, a global financial services company that has worked in cooperation with ASAE since 1992. Before anything else, Meek says, associations must create written investment policies. A written policy is "the critical first step," he says, "tantamount to a blueprint of the level of expectations." Association leadership must ensure that the expectations outlined in the policy are consistent with the organization's liquidity and its strategic asset allocation. Then, equipped with "marching orders," Meek searches for and selects the mutual funds or money managers that mesh with the organization's policies and expectations.

Investment policies probably will not change often, perhaps only every three to five years. Typical guidelines might be 50 percent in large U.S. stocks, 25 percent in smaller stocks, and 25 percent in domestic bonds or 40 percent in bonds and 6o percent in equity stocks. Besides diversification of securities, a well-crafted policy also should include performance measures, benchmarks, and any specifically prohibited transactions or investments, Cauble says.

Most associations take a balanced approach to investing, says Meek. When the market was doing well, some associations sought to increase their returns by authorizing more risk, but those who assumed more risk in the 19ii9os should not have been surprised if they were punished by recent downturns. "They got more vigorous returns in the up market and should have known the expectations from their more aggressive stance in a down market. But much depends on where in the continuum they entered and left the market."

Investment policies should build in some flexibility, giving decision makers the authorization to shift allocations within assigned percentage ranges. Braly suggests setting benchmarks for losses so that decision makers have guidelines. "The time to think about it is before things turn sour," he says. "The market is going to fluctuate, but you have to remember if you take no risk, you're not going to get any reward either."

Today's market is forcing every organization to reexamine its policies and strategies, regardless of its past approach to investments. An annual review of allocations and directives is a minimum requirement; more often is recommended during volatile market cycles, when moving quickly is important to saving capital.

Investing in anything more aggressive than certificates of deposit makes working with a professional broker or investment consultant essential, Cauble says. "Even some conservative investors have felt the 'pinch' the last 18 months and when they are readjusting their portfolios and moving ahead, it's important to have the advice and guidance of a professional."