Internal controls are the operating procedures a nonprofit relies on to keep things running smoothly and reduce the potential for inappropriate behavior within the organization.
Essential Internal Controls Every Nonprofit Needs
1. Authority to Spend
Deciding who has the authority to make and implement financial decisions is critical. For small organizations, this is usually a single person, but that person should not be the same as the individual responsible for account reconciliation. The important factor to consider is limits and boundaries for access to your nonprofit’s financial accounts, whether it is a cash box or checking account.
2. Security Controls
Another facet that is often overlooked is general security. Electronic equipment is easy to unplug and remove, and it can happen in only a few seconds. Access to computers and other company equipment should limited by making sure entry and exit doors are locked when no one is available to monitor the doors. Installing an audible tone when doors open can be beneficial in reducing external theft.
3. Reconciling Cash and Accounts
When possible, the person who reconciles the checking account should be different than the person who receives and processes deposits. This can be difficult for small nonprofits, but dividing the tasks of account management and account reconciliation will make it easier to identify potential embezzlement. Similarly, when cash is being handled such as during and after a fundraiser, counting the funds should be done by two individuals who are both present during the process.
4. Internal Audits
Another handy way to maintain control over finances is to perform regular internal audits. This is similar to an expanded reconciliation of accounts, except that all accounts received and payable need to be examined concurrently. As with other forms of account management, using two individuals to audit financials will eliminate potential misappropriation of funds.
5. Line Audits
When a donation or grant is received, it may be accompanied by stipulations which determine how the money may be utilized (a.k.a. conditional contribution). Line audits are used to correlate the terms of use with actual expenditures, verifying that funds are being used for their desired purposes. Line audits associate each expenditure with an allowable expense item in the terms of the donation.
With the right set of internal controls in place, your organization can establish a system that helps keep members honest, and uses self-checking activities to verify expenditures and that donations are used correctly. If you have any questions about establishing internal controls or about our nonprofit audit services, contact our friendly CPAs at Ernst Wintter & Associates LLP today at (925) 933-2626 or on our contact page.
