CED Nonprofit Governance & Compliance 2 — Questions and Answers
Question 1: A nonprofit board member learns that the organization is about to enter a contract with a company she owns. What is the MOST appropriate action?
- Recuse herself and disclose the conflict in writing to the full board (Correct answer)
- Vote in favor only if the contract benefits the nonprofit
- Abstain from the vote but remain in the room during discussion
- Notify the state attorney general before any vote occurs
Correct answer: Recuse herself and disclose the conflict in writing to the full board
Board members must disclose conflicts of interest in writing and recuse themselves from related discussions and votes to satisfy fiduciary duty of loyalty.
Question 2: Which IRS form must most tax-exempt organizations with gross receipts of $200,000 or more file annually?
- Form 990-EZ
- Form 990 (Correct answer)
- Form 990-N
- Form 1023
Correct answer: Form 990
Organizations with gross receipts ≥$200,000 or total assets ≥$500,000 must file the full Form 990 annually.
Question 3: What does the nonprofit governance principle of 'duty of care' require of board members?
- Donating at least 10% of personal income to the organization
- Acting in good faith with the diligence of a reasonably prudent person (Correct answer)
- Attending every board meeting without exception
- Personally auditing all financial statements
Correct answer: Acting in good faith with the diligence of a reasonably prudent person
Duty of care obligates board members to make informed decisions with the judgment a reasonably prudent person would exercise in similar circumstances.
Question 4: A charity solicits donations without registering in a state that requires charitable solicitation registration. This is primarily a violation of:
- IRS regulations under Section 501(c)(3)
- State charitable solicitation laws (Correct answer)
- FASB accounting standards
- Federal Trade Commission guidelines
Correct answer: State charitable solicitation laws
Most states require nonprofits to register before soliciting donations, and failure to do so violates state charitable solicitation statutes.
Question 5: An executive director wants to add a new board member who is also a major donor. Which governance concern is MOST relevant?
- Excessive board size
- Potential conflict of interest between donor interests and fiduciary duty (Correct answer)
- IRS prohibition on donor board members
- Violation of the Sarbanes-Oxley Act
Correct answer: Potential conflict of interest between donor interests and fiduciary duty
A major donor serving on the board may face conflicts between personal financial interests and their fiduciary obligations to the organization.
Question 6: What is the primary purpose of a nonprofit's whistleblower protection policy?
- To comply with unrelated business income tax rules
- To protect employees who report suspected fraud or misconduct from retaliation (Correct answer)
- To limit board member liability for financial losses
- To satisfy grant reporting requirements
Correct answer: To protect employees who report suspected fraud or misconduct from retaliation
Whistleblower policies protect staff and volunteers who report suspected illegal activity or policy violations from retaliation, a best practice encouraged by Sarbanes-Oxley.
Question 7: Which of the following activities could jeopardize a nonprofit's 501(c)(3) tax-exempt status?
- Paying reasonable compensation to the executive director
- Endorsing a candidate for public office (Correct answer)
- Conducting nonpartisan voter registration drives
- Charging fees for services related to the mission
Correct answer: Endorsing a candidate for public office
Section 501(c)(3) organizations are absolutely prohibited from participating in or intervening in political campaigns on behalf of or against any candidate.
CED Nonprofit Governance & Compliance 2
A nonprofit board member learns that the organization is about to enter a contract with a company she owns.
What is the MOST appropriate action?