Like any corporation, private clubs have an organizational structure and a number of controls set in place to ensure compliance and best governance practices. One major area of interest for the board of directors and, in effect, members, is the financial oversight that keeps the club operating successfully, safeguards its assets and provides reliable financial reporting while also maintaining its private club status.
Volunteer management plays a critical role in the financial oversight of any private club. This stewardship involves examining the organizational structure, the control environment and the policies and procedures that are set in place.
Governance Structure
The board of directors plays a key role in the oversight and success of a club. It is important that parameters be established to provide the board members with a clear understanding of their role and responsibility. Its authority derives from the membership, which elects it. Guided by the club’s bylaws, mission statement, articles of incorporation and other governing documents, the board exists to set club policies and procedures, regulate fees and charges, admit (and when necessary, discipline or expel) members, and define and protect the club’s interests, both material and intangible.
Another key element in the organizational structure of private clubs is an audit committee. An audit committee might be comprised of three to five club members who possess an understanding of nonprofit finance, generally accepted accounting principles and auditing standards, internal control systems, and the mechanics of financial reporting. To guarantee the audit committee’s effectiveness and independence, the club should make the audit committee a stand-alone committee and not a subset of an existing committee, such as the finance committee. The audit committee should also draft a charter that clearly defines its responsibilities, keep minutes of its meetings, and conduct annual self-evaluations to ensure its continued success.
In establishing an organizational structure, an organization chart is helpful. It defines management’s lines of responsibility and authority and vests individuals with the authority to act. Having lines of authority in place sets the approval process. If an employee detects a weakness here, they can defraud the system, so it is important that those lines of authority are communicated clearly.
Audit committee members should meet directly with auditors to discuss any issues that may arise. Auditors must communicate (in writing if publicly held) significant deficiencies and material weaknesses.
Selecting an independent auditor is as crucial as forming an audit committee. Proper care should be taken to select a firm without ties to the club in order to ensure a transparent business relationship.
Bylaws
The operating foundation for every private club is the bylaws. Bylaws exist to serve as a foundation from which the club operates and establish the board as the highest governing body of the club. Club policies, formed from the board’s decisions, determine how to implement the bylaws and govern the club. When there is a significant club issue that needs to be addressed, club management and the board will reference these documents. Accordingly, they should be reviewed and maintained to ensure they provide direction consistent with the club’s intent. Where appropriate, they should also include a mechanism for problem resolution. Often, clubs have a legal or bylaws committee that would assist the board in interpreting bylaws, rules and other governing documents.
Establishing a Control Environment
One of the major oversight responsibilities of the board should be to ensure management’s operating philosophy is clearly communicated to all employees. Management should subscribe to the best practices approach, and it is imperative that they lead by example. The general manager needs to provide a clear signal to employees as to the importance of internal controls.
The operating style of the general manager plays an important role in the overall financial operation of a club. Strong emphasis on ethical behavior and integrity will demonstrate the values expected of employees. The general manager, working with the audit committee, should ensure the club has internal controls adequate to cover both daily tasks and annual projects, which staff will be expected to follow. These procedures should assure compliance not only with club operating rules, but also with state and federal laws and regulations.
Those charged with governance must truly lead by example. The control environment reflects the overall attitude, awareness and actions of club leaders concerning the importance and enforcement of internal controls. The significance of integrity and ethical values should be clearly communicated to employees, as well as the disciplinary action that will be taken against any employees who do not live up to the integrity and ethical standards established by the club.
Policies and Procedures
All policies and procedures should be formally communicated in writing. Written employee policies related to internal controls should be in place to facilitate consistent conduct throughout board and staff transitions. But it’s not enough to simply have these policies and procedures written. The rules must be consistently applied and followed. Having these written policies and procedures provides a means of formally communicating management’s philosophy, expectations and responsibilities.
Job descriptions and related policies also need to be in writing and clearly communicated, as do conflict of interest policies and statements. A conflict of interest statement should be signed by employees to indicate receipt, understanding and compliance with the code. Communicating these policies clearly and in writing will assist the club in emphasizing to both staff and members the club’s steadfast adherence to the elements of the policies.
The club also needs to provide a clear statement of the actions that will be taken for failure to adhere to any of the written policies and procedures. Employees must understand that theft and fraud will, under no circumstances, be tolerated.
Private Club Status
Given the financial needs of private clubs in today’s operating environment, management may look for ways to generate additional revenue that may impact their private club status. Board members should be aware of the general parameters surrounding these issues and ensure that management is operating within them.
NCA encourages its members to take careful note of the factors that determine whether a club is truly private. A club’s purely private status impacts, among other things, whether the club must comply with certain legal statutes such as state and local public accommodation laws.
In evaluating the private status of a club, some factors that are considered are whether the club: is member controlled, is organized exclusively for social and recreational purposes, has selective admission policies, relies primarily on member income for capital and operating funds, requires guests to be accompanied by a member, strictly limits the size of its membership, and has policies that prohibit business use of facilities.
Assessing Risk
Perhaps one of the greatest threats to a club’s existence is exposure to financial risk from a non operating issue. This may occur through an accident on club property, inappropriate treatment of an employee, failure to provide a safe operating environment, or other extraordinary circumstances. The Board must constantly review all areas of potential club exposure and evaluate how to mitigate future claims against the club. This should include at a minimum an annual review of all insurance coverage.
On an annual basis (or as needed), the Board should take the time to review the overall issues impacting the private club industry to see how their club may be adversely affected. Changes in federal and state laws may necessitate revising operating policies and procedures to prevent increased club exposure.
Financial oversight is one of the key responsibilities of a club’s governance structure. It is imperative that the board take the necessary steps to ensure the safeguarding of assets, reliable financial reporting, and maintaining the club’s private status.
John “Jack” Zook, CPA/PFS, MBA is the founder and managing director of Zook Dinon PA, Certified Public Accountants, located in Moorestown, New Jersey, and a full-time faculty member in the accounting department at La Salle University in Philadelphia. He also serves as NCA’s Treasurer.