Internal controls are the accounting and financial business processes and procedures that help to protect your organization’s assets. Regardless of the size or mission of a nonprofit, it is necessary to establish policies and procedures that prevent misuse and misappropriation of assets. These internal controls will ensure that all staff or volunteers, who have access to spending or collecting monies, understand their fiduciary responsibilities, all assets are properly managed, and the primary purposes of the nonprofit are carried out. When these criterion are not met, it results in a breach of fiduciary duty and financial liabilities.
The most effective procedures are those that have the greatest segregation of duties. This is the concept of having more than one person required to complete a task. The separation by sharing of more than one individual in one single task is an internal control intended to prevent fraud and errors. The more people involved in the process, the less likely it is that an error will occur. For example, the person who writes checks should not be the person signing them. The person who orders the service or product should approve the invoice. The person with budget responsibility should also approve the expenditure and code the invoice.
Typically, internal controls are written policies that detail agreed-upon procedures that the nonprofit will adhere to, as well as outlining who the responsible parties are. The goal of internal controls is to create business practices that serve as “checks and balances” on staff or outside vendors in order to reduce the risk of misappropriation of funds.
The following are examples of some basic internal controls:
- Requiring two signatures on a check.
- Establishing safety protocol ensuring all doors are locked when no one is monitoring the entrance.
- Preapproving spending, as a prerequisite to guaranteed reimbursements.
- Requiring multiple persons to be present when collecting and counting cash donations.
- Regularly reviewing vendors who are receiving money from the nonprofit for services or supplies.
- Ensuring that the same person isn’t authorized to write and sign a check.
- When opening mail, endorsing or stamping checks “For Deposit Only,” listing checks on a log before turning them over to the person responsible for depositing receipts, and periodically reconciling the incoming check log against deposits.
- Requiring that cash be stored in a locked drawer or safe.
- Requiring background checks for employees or volunteers who handle money.
Another facet to consider is the actions of executive staff and leadership to adhere to internal controls. Leading by example is the best way to ensure compliance of rules by the rest of your staff and volunteers. Additionally, acknowledge that these controls are being implemented as a measure to protect the staff and organization and not due to mistrust. If you are wondering where to begin establishing internal controls for your nonprofit, a good place to start is with:
- Any person who has access to your bank accounts or
- Any person with permission to spend money on your organization’s behalf.
Without establishing these procedures, your nonprofit is vulnerable to misuse and misappropriation of assets. At Beck and Company Certified Public Accountants and Business Advisors, we are an accounting and consulting firm delivering specialized expertise, creative thinking, and unsurpassed service to ensure that our clients’ financial endeavors flourish.
Serving small and mid-sized organizations and individuals, we provide audit, tax, accounting, and consulting service that address all aspects of your business with one goal in mind – exceeding your expectations. We are able to do this by drawing on our combined business backgrounds and experience in public accounting to help you in virtually any area of your business. Contact us for more information on our accounting and consulting services that can help you.