Internal Controls for Nonprofit Organizations

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Fraud occurs in nonprofits all too frequently. Strong internal controls, no matter how big or small an organization may be, are the best way to protect an entity from being the victim of fraud. Internal controls are policies and procedures that protect the assets of an organization and create reliable financial reporting. They are always closely examined during an external audit but should be assessed and documented internally on an ongoing basis.

The key to good internal controls is the segregation of duties, which means involving more than one person in various phases of the accounting cycle. Here are some examples:

  • Cash Receipts: Cash receipts should be received and processed by someone who does not complete the monthly bank reconciliations. Checks should be logged as soon as they are received and endorsed “Deposit Only” immediately but should be recorded in the accounting records by a different staff member. Lockboxes can also be utilized to add an additional layer of security so that all receipts are handled by a third party employee at a bank rather than any in-house employee.
  • Cash Disbursements: One staff member should prepare the checks and attach all supporting documentation to then be passed onto and reviewed by an authorized check signer. Some nonprofits require dual signers so that they have a second set of eyes on all money going out the door. Some even opt to utilize a positive pay service which allows the organization to notify the bank in advance of any checks sent out so that only checks presented which match that information may be processed.
  • Bank Reconciliations: Bank reconciliations should be performed monthly by someone that does not have check signing authority or cash receipts duties and after completion, both the statement and reconciliation should be reviewed by management.
  • Financial Statements: Financial statements should be prepared by an accounting staff member but should be reviewed by management each month to check for any large budget variances or unusual line items.

With small nonprofit organizations, it can seem difficult to achieve the appropriate segregation of duties but they are critically important whenever feasible. When your staff is small, don’t be afraid to involve your board members. Or maybe it’s time to consider outsourcing!