How to Incorporate Proper Internal Controls to Boost Your Nonprofit Organization’s Success

Operating process controls are vital to every organization, including nonprofit organizations. These processes can be very challenging for small nonprofits because of limited employee numbers and operating budget constraints. Management in small organizations takes on many duties that would be separated in larger organizations, while nonprofits also have limited financial resources for starting control systems. This can leave them open to risks, including financial. By having proper internal controls, your nonprofit can mitigate the damage that can occur from mistakes and infractions.

Internal Control Purpose

What exactly are internal controls and how do they help you protect your nonprofit organization? Internal controls are a collection of procedures and policies that are implemented to safeguard your organization’s assets and prevent fraud. They not only mitigate accidental errors and intentional fraud, but internal controls can also make your organization’s daily operations more efficient. By having strong controls in place, your organization will be able to more easily prevent, detect and fix mistakes in your financial statements. By consistently reviewing your internal controls annually, you can make sure they’re still relevant and are consistently applied. These controls should encourage an organizational culture of agency-wide transparency and financial responsibility.

Clearly Defining Management Roles

Your staff, in every position, should have clear responsibilities, and you should have an organization chart that covers who is responsible for what area of its operations. All employees should have clear knowledge of what they should be completing on a daily, weekly, monthly, quarterly and annual basis. This ensures no steps in the process are skipped, which can lead to errors on financial statements. As an example, an incorrect invoice could be paid if the person responsible for payment didn’t verify it because they thought that was someone else’s responsibility. By having your management team set a consistent tone and follow through on the control policies and procedures when completing their duties, this sense of duty will flow down to others in the organization and create a positive impact for the entire organization.

Training to Prevent Fraud

To identify and deter fraud, organizational employees can be one of your greatest resources. However, if they haven’t been trained on what to look for, they can’t take on this responsibility. By training your employees to understand what is actually considered fraud, they can identify and report suspicious activity. Your employees should be comfortable going to upper management or even the Board of Directors with suspected fraud so that it can be dealt with in a timely manner. Though an outside audit may be needed on a regular basis, it is no replacement for solid internal control practices. The Association of Certified Fraud Examiners (ACFE) provided in their 2020 Report to the Nations 191 analyses of internal fraud cases in nonprofits. In this report, the median loss due to internal fraud was $75,000, but the average loss was $639,000, with 40% discovered through tips or complaints and another 30% discovered through management review or internal audits. A zero-tolerance policy for fraud must be communicated to all nonprofit employees.

Transparency in Financial Accounts

In many situations, a single bookkeeper or accountant handles most if not all of the accounting for small nonprofits. Because of this reason, it’s vital that someone beyond the bookkeeper gets bank statements and oversees the reconciliation process. This individual needs to open and review the statement for any unusual or odd activity. They’ll also need to have online access to bank statements in a read-only format. They should verify that all the checks have cleared and ensure that they appear in the normal course of the nonprofit’s operation. By having a second individual reviewing and reconciling bank statements on a monthly basis, fraud likelihood decreases markedly.

In Conclusion

By having controls in place to train employees, check for fraud and report suspicious activity, you can drastically reduce the chance that your nonprofit organization will have fraud occur. But what if you’re not sure exactly what kind of controls you should be putting into place? No matter how large your nonprofit organization is, there are a range of options that will help protect your organization’s resources from errors and fraud by adding internal controls.

If you have any questions or need help developing proper internal controls, policies and procedures for your nonprofit, please contact any of the professionals in our Nonprofit Group.