CED Professional Standards & Ethics 3 — Questions and Answers
Question 1: Under the Sarbanes-Oxley Act provisions that apply to nonprofits, which of the following is required of all tax-exempt organizations?
- Annual external audit by a Big Four firm
- Whistleblower protection policies and document retention policies (Correct answer)
- Independent compensation consultant for executive pay
- Mandatory board term limits of six years
Correct answer: Whistleblower protection policies and document retention policies
SOX requires all organizations, including nonprofits, to have whistleblower protections and document retention policies to prevent retaliation and destruction of records.
Question 2: A staff member reports suspected elder abuse involving a client to the ED. The ED's first obligation is to:
- Conduct an internal investigation before involving authorities
- Report to the appropriate state agency as required by mandatory reporting laws (Correct answer)
- Notify the board and wait for their direction
- Consult legal counsel before taking any action
Correct answer: Report to the appropriate state agency as required by mandatory reporting laws
Mandatory reporting laws require designated professionals to report suspected abuse to state authorities immediately, overriding internal processes.
Question 3: An executive director who serves on the board of a for-profit company that provides services to their nonprofit has what type of conflict?
- Apparent conflict only
- Actual conflict of interest (Correct answer)
- Immaterial conflict that requires no disclosure
- Theoretical conflict waived by prior board approval
Correct answer: Actual conflict of interest
Serving on a board of a vendor while directing purchasing decisions for the nonprofit is an actual conflict of interest requiring formal disclosure and recusal.
Question 4: Which ethical framework focuses on an action's outcomes and maximizing overall benefit when applied to nonprofit decision-making?
- Deontological ethics
- Virtue ethics
- Consequentialism (Utilitarianism) (Correct answer)
- Care ethics
Correct answer: Consequentialism (Utilitarianism)
Consequentialism evaluates the morality of decisions based on their outcomes, focusing on producing the greatest good for the greatest number.
Question 5: A donor stipulates that their gift must be used for a program the organization has since discontinued. The ED's ethical obligation is to:
- Redirect the funds to operations since the program no longer exists
- Contact the donor to discuss alternative uses or return the gift (Correct answer)
- Use the funds for the most similar active program without notification
- Hold the funds indefinitely in reserve
Correct answer: Contact the donor to discuss alternative uses or return the gift
Restricted gift ethics require honoring donor intent, which means engaging the donor when circumstances change rather than unilaterally redirecting funds.
Question 6: What is the primary purpose of an organizational code of ethics for a nonprofit?
- To satisfy IRS Form 990 reporting requirements
- To provide a framework for decision-making aligned with organizational values (Correct answer)
- To replace state and federal legal compliance requirements
- To limit board liability in the event of staff misconduct
Correct answer: To provide a framework for decision-making aligned with organizational values
A code of ethics serves as an internal guide that aligns decision-making with the organization's core values and stakeholder expectations.
Question 7: An ED is asked by a board member to hire the board member's unqualified relative for an open position. The ED should:
- Hire the relative to maintain a positive board relationship
- Refuse and report the request to the board chair or governance committee (Correct answer)
- Interview the candidate but ensure they do not advance
- Request the board member formally recuse from the hiring decision
Correct answer: Refuse and report the request to the board chair or governance committee
Nepotism requests from board members violate conflict-of-interest standards and must be reported through proper governance channels.
CED Professional Standards & Ethics 3
Under the Sarbanes-Oxley Act provisions that apply to nonprofits, which of the following is required of all tax-exempt organizations?