The Importance of Setting Internal Controls in Nonprofit Accounting

Nonprofits-Setting-Internal-Controls-in-Nonprofit-AccountingNonprofit organizations are required to adhere to strict accounting and financial reporting rules and regulations. While nonprofit fund accounting software can certainly ease the burden of these regulations with built-in tracking and auditing features, it cannot completely protect the financial integrity of your organization. In order to protect your nonprofit against unauthorized expenditures, fraud, embezzlement, and inaccurate financial reports, you need to set effective internal controls. By establishing policies and procedures that protect your organization’s assets, promote compliance with laws and regulations (such as the Sarbanes-Oxley Act), create reliable financial reports, and support efficient and effective operations, you are establishing rock-solid accountability in a day and age where many businesses and nonprofits lack accountability.

Below are a few tips designed to help you set effective internal controls:

  • Establish procedures for monitoring your organization’s assets. These financial controls should be included in your organization’s accounting policies and procedures manual and should be reviewed by all directors and officers, volunteers, trustees, and employees. Be sure to include the follow controls in your accounting manual:
    • General organization controls: This includes the preparation of the annual income and expense budget and quarterly reports comparing actual receipts and expenditures to the budget. Reports should be fully explanatory and address any time variances.
    • General IT controls: You should establish a specific process for accessing, inputting, and altering electronic information within your organization.
    • Segregate financial duties: Establishing a system checks and balances by segregating duties is crucial to ensuring your financial integrity. Make sure there are multiple people assigned to cash handling, accounting, and financial reporting duties. Never let only one person do all of it!
    • Accounts Payable and Purchasing: No single person should be responsible for handing the requests, authorization, verification, and recording of expenditures. This includes petty cash, payment of invoices, and other expenditures.
  • Clearly define the roles within your organization. Make sure that all of your employees, volunteers, directors, officers, and trustees have a clear concept of the expectations and limitations of their job. Failure to do so puts your organization at risk.
  • Keep written record of your organization’s personnel policies. This includes vacation and sick leave, evaluations, compensation, grievance procedures, health insurance and other benefits, and code of ethics. Provide all employees with a copy of these policies upon hiring and make sure to communicate changes as they occur.

Setting internal controls is important to your nonprofit’s reputation. It can help ensure financial integrity and protect you from fraud, as well as help you create more effective (and accurate) financial reports. If you’d like to learn more about setting internal controls, attend our webcast in March.