Tax-Exempts and Fiduciaries

by Stephen Kass on July 10, 2012

For CPAs who work for or advise tax-exempt entities such as charities, retirement Plans or other nonprofit organizations, it’s important to be aware that the client has
fiduciary responsibility to manage the organization’s assets with care and prudence. Additional factors to keep in mind:

  • If the entity does not have a well-defined investment policy, then the organization’s investment approach may be adrift. The entity should establish a policy that addresses the organization’s goal for its investment portfolio and the boundaries within which portfolio management will occur – asset allocations, appropriate levels of risk, performance goals, portfolio management costs and methods for objective ongoing evaluation.
  •  The organization’s investment policy may not accommodate the passive nature of index fund investments. For example, an index fund may be too heavily weighted in one sector, such as technology, or it might invest in companies that the organization would not buy shares of directly because of social concerns.
  • Mutual funds may conduct activities that an exempt organization would not engage in during the course of ordinary business care and prudence, such as margin debt obligations, investments in futures contracts and repurchase agreements. CPAs should consider whether employing these devices complies with their client’s investment policy.

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