Is Bonding a Non Profit Treasurer Really Necessary?
When reviewing all the best financial practices for your nonprofit, we know there are so many competing priorities. While implementing nonprofit treasurer software or finding a great nonprofit treasurer report template are activities that are more top of mind, deciding whether or not to bond your treasurer is an important decision you will need to make.
A treasurer surety bond obligates an individual to uphold their employment agreement by operating honestly and with integrity. If the treasurer mishandles money when performing the duties on the nonprofit treasurer checklist, the bond will provide restitution up to the bond amount.
Bonding a person or persons with your organization isn’t free. When resources are scarce, diverting them to something like bonding someone takes money away from other tasks that may be closer to your core mission. Many of our smaller nonprofit clients who are interested in five internal controls for the small nonprofits often ask, "how necessary is it?" It can be difficult to answer this question. Much like home owners insurance, if you never have a fire or a break-in, you pay for insurance but never really get anything from it.
Likewise, if your treasurer is trustworthy and responsible, you’ll never need the bond. That doesn’t mean that getting insurance on your house, or bonding your treasurer, isn’t a good idea! In this article, we will lay out all the pros, cons, and additional information you need to make an informed decision.
Here’s what we’ll cover:
- What is Surety Bond?
- What Are the Advantages of Bonding Your Treasurer
- What Are the Disadvantages of Bonding Your Treasurer
- Should You Bond Your Treasurer?
- How Do You Obtain a Bond?
What is Surety Bond?
Merriam-Webster defines a surety bond as a bond guaranteeing the performance of a contract or obligation. That definition can be a bit confusing at first glance. The important thing to remember is that it is a three-party contract. The three parties are:
The obligee: for a nonprofit, it is the organization that wants protection from any loss by potential misconduct by the treasurer.
The principal: this would be the nonprofit treasurer. The surety is guaranteeing that the treasurer, the principal, will carry out their duties properly.
The surety: this is the bank or third-party company that actually provides the bond. They will pay out an agreed-upon amount if the treasurer fails to perform their task or engages in theft or fraud.
If the treasurer violates the terms of the agreement, the nonprofit will make a claim on the bond.
Emily is curious about the necessity of bonding a nonprofit treasurer!
As long as the claim is made in good faith and proper procedures were followed, the surety will pay the claim. The treasurer would then be subject to any repercussions involved in the surety’s efforts to recover the bond.
What Are the Advantages of Bonding Your Treasurer
There are indeed several advantages to bonding your treasurer. They mostly concern maintaining and ensuring others of your financial security. But there are other considerations:
Peace of mind: just because something is extremely unlikely to go wrong, doesn't mean it won’t. If it does, the damage may be hard, if not impossible, to recover from.
Assures stakeholders: asking people to support your mission and organization is hard enough on a good day, but if they doubt your financial security, they may view donating time (for volunteers or staff) or money (for donors) as too big of a risk. If staff and other organization stakeholders know that you have invested in a surety bond, they will see that you are serious about making sure everyone in your organization acts with propriety and never engages in conduct forbidden by law or ethics.
Encourages relationships: much like donors, grantors want to know their grants’ funds will be secure, and not end up disappearing through an act of fraud.
What Are the Disadvantages of Bonding Your Treasurer
Bonding has its share of disadvantages too. Here are a few:
Cost, if paid for by the organization. Obtaining a surety bond can be expensive, and as stated above, this may siphon resources from other projects. A good rule of thumb is to expect that the cost of the bond will be somewhere between 1 and 3 percent of the total value. So if the bond is for 1 million dollars, then the cost would be between 10 and 30 thousand.
Cost can deter treasurers. Even if you do not require the treasurer to pay the bod, an employer going well beyond checking references by asking for a surety bond is similar to asking for a prenuptial agreement before getting married. In some instances, it can create relationship issues and breed a sense of distrust. Also, it's not an uncommon requirement for treasurers seeking employment with larger organizations to provide their own surety bond for the length of their employment. Requiring a large amount of money for a bond, and all the red tape involved in obtaining one may deter some from seeking employment.
Can tarnish relations with the treasurer. Though plenty of potential treasurers will understand why you are attempting to obtain a bond, some may interpret this as a sign that they aren’t trustworthy.
Pro Tip: In order to avoid any potential bad feelings from seeking a bond with your treasurer, have an open, honest, and in depth conversation with them beforehand, allowing them to ask any questions they have. Just like when discussing the importance of the monthly nonprofit treasurer report, it is important to convey the reasons for wanting to get a bond in a transparent manner. Encourage them to see the matter from your perspective, and hopefully they’ll understand that the bond, much like your nonprofit’s policies and procedures manual, is one way that helps protect the financial integrity of the nonprofit.
Should You Bond Your Treasurer?
As long as bonding your treasurer isn’t going to create a massive financial hardship, then it's a very good idea. The fact is that no one can predict the future and the stakes are extremely high. If a treasurer or another employee were to act dishonestly, it could have disastrous effects for your organization.
Now Trish is wondering, should she bond her treasurer?
Once you develop a bad reputation, and donor and investor funds have disappeared it will likely be challenging to recover their trust or the trust of potential donors. Fundraising could become next to impossible.
Keep in mind that there may be circumstances where you are required by statute, the bylaws of a parent organization, or the financial policy for your nonprofit organization to get a bond on your treasurer. For example, the United Methodist Church requires its member churches to obtain a bond on their treasurers.
Pro Tip: Remember that while bonding your treasurer is a great way to get peace of mind, it should not be a replacement for proper internal controls (see our sample nonprofit internal controls policy for additional details). These are your first line of defense against theft, fraud, embezzlement or innocent error. Even if a bond were to save you from financial collapse, the damage to your reputation from bad financial practices could be severe. Always perform an annual audit of records to make sure activities are being conducted properly.
How Do You Obtain a Bond?
Obtaining a bond can usually be accomplished in these 7 steps:
Identify the individual or individuals who are going to handle your organization's funds, likely the treasurer. You can also designate multiple people who will be bonded, which may be necessary to maintain appropriate internal controls and financial accountability for nonprofit boards.
Use a worksheet and financial reports to compute the coverage amount of the bond.
Contact an approved surety company. Check with local insurance companies and visit the US Treasury’s website for tips on how to find a reputable company. Use a checklist to make sure the company complies with all laws and ethics.
When you speak with the surety company, they can double-check the amount in step 2, but it’s helpful to have that information as your search begins.
Compare multiple surety companies' services and costs.
Pay your premium to the surety company you select and provide all necessary information.
Keep a record of the bond on file with other important documents. If the bonded individual leaves your organization, be sure to let the surety company know immediately. If your outgoing treasurer has secured their own bond, they may no longer need to pay the premium.
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