Nonprofit organizations must emphasize financial transparency and responsibility to maintain trust among stakeholders, donors, and the general public. To achieve this, organizations should prioritize internal controls. While larger organizations benefit from a wealth of tools, resources, and departments to establish strong internal controls, smaller organizations face distinct challenges stemming from financial constraints, limited resources, and a smaller workforce. Despite these challenges, internal controls are essential for small nonprofits to prevent financial loss, maintain public trust, and avoid legal issues.
What Are Internal Controls?
Internal controls encompass a set of processes, procedures, and policies established by organizations to achieve several critical objectives. These objectives include ensuring the integrity and accuracy of financial reporting for both internal and external users, complying with relevant regulations, and improving overall operational efficiency. For small nonprofits, these controls ensure board members and management fulfill their fiduciary responsibilities, manage donor funds properly, and maintain accurate financial records, free from intentional or unintentional errors or mismanagement.
We suggest implementing these 4 internal controls for your organization:
- Segregation of Duties: In small nonprofits with limited staff and volunteers, dividing responsibilities could be difficult. Below are some tips that can help:
- Bank Reconciliation: The person reconciling the bank account should not be writing checks or making deposits. The bank reconciliation and statement should be reviewed each month by the executive director, a finance committee member, or board treasurer.
- Payroll: One person should review and approve time sheets or salary changes and someone else should process payroll.
- Cash donations: Any cash donations should be counted and documented by two people. Cash should be kept in a lock box at events and deposited as soon as possible.
- Recording donations: One person records the donation in the donor software, someone else deposits the donation in the bank account, and a third person reconciles the donor database with the bank statement.
- Access Controls: Limit access to sensitive information and financial documents to authorized individuals.
- For example, the bookkeeper should have access to the accounting software but may not need access to the donor tracking software if someone else is recording donations.
- Financial Oversight: Establish clear oversight responsibilities, such as board oversight, to align financial decisions with organizational goals.
- The board treasurer should be regularly reviewing financial reports which may include the balance sheet, income statements, budget vs. actual and bank reconciliations.
- Authorization & Approval: Implement approval processes for transactions and budgets to prevent overspending.
- The person writing checks should not be signing them.
- Use board members as necessary to approve transactions over a certain amount.
- Consider the use of bill management software that allows organizations to easily track approvals for expenses.
These four controls are a great starting point for small organizations to develop an effective system of internal controls. While small nonprofits may face implementation challenges, the benefits of protecting resources, ensuring accurate financial reporting, and building trust far outweigh these difficulties. Robust internal control frameworks enable nonprofits to strengthen operations, build community trust, and significantly impact the causes they serve.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.
