Financial Controls are Important for Nonprofits

Financial Controls are Important for Nonprofits

When was the last time your nonprofit reviewed its financial controls? Do you even have financial controls?

Most people working with nonprofits are doing it with a good heart for a good cause. Unfortunately, this can create a halo effect. Due to high levels of trust and the camaraderie that comes from doing a good thing together, board members and staff may overlook the need for financial controls for the nonprofit. Thousands of nonprofits have had to report diverted assets on their annual tax return. The adage “trust, but verify” comes to mind.

So how do you put financial controls in place? Each organization will be different, but consider:

  • Financial data should be periodically shared with board and with other staff members.

  • Stakeholders should feel comfortable asking questions about the finances, especially when something is not making sense. Management should be able to provide clear and accurate answers to financial questions without getting defensive or combative.

  • Clearly define roles and have more than one person involved in all financial aspects of the nonprofit. For example, one person should reconcile the monthly bank statements and a different person should be charge of making deposits. Monthly bank and credit card statements should be sent to someone who does not have credit card or bank access. If only one person is in charge of everything, there are no checks and balances and any fraud can go unnoticed for a long time.

  • Bank statements should be reconciled monthly and any irregularities, such as missing check numbers, resolved. Make sure that all debits make sense and payments are being made to appropriate vendors. If the reason for a payment isn’t clear or a payment amount seems inflated, find out more.

  • Staff involved in financial management should be required to take at least one week (preferably two) of consecutive vacation. This can allow financial irregularities to surface without the person being in office to cover their tracks.

  • Financial information should be kept secure. This means computers and financial programs should be protected with secure passwords, checkbooks should be kept in secure and locked locations, etc.

  • Consider requiring two signatures for larger checks. What is considered “large” will vary by organization. For some nonprofits, a $500 expense would be large and should require two signatures. For others, a higher limit of $1,000 or even $10,000 would make sense.

  • Consider ordering an annual credit report for your organization no one has opened up secret lines of credit or taken out unauthorized loans for the organization.

  • Consider an occasional surprise internal audit. Track all money going through the organization, which vendors are being paid, etc. Make sure everything adds up and reconciles appropriately.

Financial controls are not fun and exciting, but they are important. Don’t fall into the trap in thinking that your nonprofit doesn’t need financial controls because it is all volunteer, only has “good” people involved, etc. All nonprofits need to have financial oversight to ensure that charitable funds are safeguarded.

IRS Drops Schedule B for 501(c)(4) Organizations

IRS Drops Schedule B for 501(c)(4) Organizations