Ten Easy-to-Adopt Internal Controls for Small Nonprofits
A Financial Auditors Perspective
By Jennifer Pollinger, Founder and Managing Partner, JLW Business Advisors LLC
Small to medium-sized nonprofits are often faced with the challenge of balancing sufficient internal controls to safeguard the organization with the burden of too many internal controls on their small accounting department. In this article, we will provide ten easy-to-adopt internal controls that any small to medium-sized nonprofit can implement today.
Entity-Level and Information Technology Controls
Entity-level controls are the foundation of an organization’s internal control structure. These controls include the control environment, risk assessment process, control activities, information and communication and internal control monitoring. The enforcement of ethical standards, hiring of competent financial staff and appropriate assignment of authority and responsibilities are examples of entity-level controls.
Information technology controls are safeguards that protect accounting systems from unauthorized access or data manipulation. Password protection and automated data entry accuracy checks are examples of information technology controls.
Transaction Controls
We have broken down our recommendations on transaction controls into three key areas: the cash disbursement cycle, the cash receipt cycle, month-end closing and financial reporting.
Review Invoices
Invoices should be reviewed by department heads or someone with knowledge of related charges before being entered into the general ledger by the accountant. The check signer should review the related invoices for approval when reviewing and signing checks.
Review Employee Reimbursements
Employee reimbursements and credit cards should be reviewed by an employee’s superior. The executive director’s reimbursement or credit card should be reviewed by someone on the finance committee monthly. This review can be performed after payment to speed up processing if it is already being reviewed by the accountant upon entering the expense into the general ledger.
Review Payroll Reports
Payroll reports should be reviewed by the executive director before cash is transferred to the payroll processing company. During the payroll report review, the executive director should review for gross pay compared to approved wage rates and reasonableness of deductions.
Limit Accountant Authority
Prohibit the accountant from being the authorized signer on:
- All bank accounts
- Investment accounts
- Line of credit
Review Significant Contributions for Donor Restrictions
Significant contributions should be reviewed by the accountant and a development department employee or the executive director to identify donor restrictions.
Analyze Donor Restricted Contributions
On an annual basis, donor restricted contributions should be analyzed to determine if the purpose of those restrictions have been met by the organization. This can include reviewing expense reports by fund from the general ledger to validate that the costs were incurred to meet purpose restrictions.
Reconcile Donor Database to the General Ledger
A reconciliation of the donor database to the general ledger should be performed at least annually. However, a monthly reconciliation will provide a faster close at year end.
Review Monthly Statements Outside of Accounting Department
The review of monthly bank reconciliations and statements should be performed by someone outside of the bookkeeper/accountant position or outside of accounting (for an organization that only has one employee in the accounting department). This review could be performed by the authorized check signer as that person would have visibility into what significant checks were written during the month. Other possible reviewers might include the executive director or a member of the finance committee.
Create a Month-End Close Checklist
Create a month-end close checklist that lists all month-end controls such as account reconciliations, financial statement preparation, review of manual journal entries, the check register, and payroll reports. The list should contain two columns for preparer and reviewer signoff. Each task would be initialed and dated by the reviewer and preparer. This review process can be performed by another person in accounting, the executive director, or a member of the finance committee.
Review Monthly Financial Sheets to Statements
Review monthly financial reports, including the balance sheet and budget to actual statement of activities by the Executive Director and the finance committee. Additional review can be performed by department budget managers who are responsible for approving expenses.
Stay Current
It is important for an organization to analyze its control structure annually to determine if changes have occurred within the organization that may require a change in the design of the controls. These significant changes could include the need to change the employees that are performing the controls or adding additional employees if the organization were to expand.
Internal controls are crucial to the success of any organization, especially small to medium-sized nonprofits. These ten easy-to-adopt internal controls will help any small nonprofit to protect their organization while avoiding an excessive burden on their accounting department. The implementation of these controls can help to ensure that the organization is running smoothly, and that the financial records are accurate and reliable. As management determines which internal control procedures are necessary for their organization, these controls can be customized and adapted to meet the unique needs of the organization. By regularly reviewing and updating these controls, nonprofits can protect themselves from potential risks and stay on the path towards success.
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