Tip of the Month - April 2003

PROTECT YOUR ASSETS WITH SOUND INTERNAL CONTROLS

There are many safeguards that your nonprofit can employ to assure that financial transactions are properly authorized, appropriated, executed and recorded. Fortunately, establishing good internal controls requires more of an investment of attention than money. Thus, very small nonprofit or even all-volunteer groups can institute appropriate controls and reap the benefits. Choose those that work and that you can sustain.

 Generally, internal controls fall into four categories:

1.      Proper authorization and approval

Identify a select group of people with decision-making responsibility, and clearly define the who, what, where and when of financial transactions. Some strategies:

• Establish an annual budget; provide the board with time to review it and as questions; and have it approved before the start of the fiscal year.

• Create a purchasing process that track purchases from request through payment.

• Make certain that staff know who has authority to obligate the nonprofit’s funds.

2.      Proper documentation and accurate recording

Establish accounting routines to ensure that no false transactions are processed and that all valid transactions are recorded at the correct amount and in the correct accounts. Some strategies:

• Require that all vendors and consultants submit detailed invoices for goods and services provided to your nonprofit.

• Require receipts for expenses of more than $5 for reimbursement.

• Demand documentation is attached to check request forms.

3.      Proper physical security

Ensure that only those that are authorized have physical or indirect access through documents or computers to money, securities, real estate and other valuable property. Some strategies:

• Ensure that blank check stock is locked up and controlled by someone other than the person who cuts checks and require that another staff member “sign out” blank stock.

• Use passwords to prevent access to accounting software and records by staff of visitors without a need-to-know. Change passwords every six weeks.

• Deposit daily receipts (checks, cashiers checks, money orders and cash) in the bank each day. 

 4.      Early detection

Establish a safety net to detect ongoing fraud and minimize the total loss to the organization. Some strategies:

• Ensure that the executive director or other senior manager receives and reviews the monthly bank statement(s) before a staff member performs the bank reconciliation.

• Cross train several staff so they can make bank deposits and perform other essential accounting duties when the regular bookkeeper or accountant is absent, and instruct them to report any irregularities.

• Engage the services of a CPA firm to conduct an annual financial statement audit; have the person report to the board without staff present.

What methods you do already apply or could you apply to protect the nonprofit’s assets? Implement those steps that make sense for your nonprofit, given the nature of your operations and extent of resources available for internal controls.

You can read more about accounting controls in Healthy Nonprofits: Conserving Scarce Resources Through Effective Internal Controls, published by the Nonprofit Risk Management Center, www.nonprofitrisk.org.

View Past Tips of the Month

May 2004 - One Million Minnesotans Can See Your Form 990
April 2004 - Avoid Unexpected Cost of Directors, Officers, and Organizational Liability
March 2004 - Strategies for Reducing Operating Costs
February 2004 - What Can Nonprofits Due During an Election Cycle
January 2004 - Celebrate Your Nonprofit
November 2003 -Get Your Board on Board
October 2003- Take a Walk-About for Safety
September 2003- Exit Interviews-Learn from those who Leave
August 2003 - Participant Waivers: The Good the Bad and the Ugly
July 2003 - Practical Tips for Reference Checking
June 2003 - Evaluating Your Insurance Professional 
May 2003 - Supervising Volunteers
April 2003 - Protect Your Assets with Sound Internal Controls
March 2003 - Teaching Computer Users to Surf Safely
February 2003 - Involve Clients in Protecting Their Own Safety
January 2003- Managing the Risk of Board Discontent

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