Cost-Effective Improvements to Your Nonprofit’s Internal Controls– July 21, 2015

When the topic of improving internal controls arises, many not-for-profit organizations anticipate a significant expenditure and seismic shift in their employees’ daily routine. More likely than not, this is not the case. Many organizations are simply unaware of relatively easy-to-fix deficiencies that exist in processes related to their financial reporting. Below are several effective and inexpensive changes to your control environment to prevent internal financial reporting errors and mitigate the risk of fraud.

Disbursements

  • Dual Signatures. Discuss with your finance department and upper management a reasonable expenditure threshold that should require two signers for a check to be disbursed, e.g., $5,000. This preventative control will provide additional attention to significant cash outlays to help ensure disbursements are reasonable.
  • Vendor Approval List & Purchase Order Request Forms. Based on the nature of your organization, upper management or a finance committee should pre-approve a list of appropriate vendors. This will help deter from funds being sent to phony vendors or vendors that may provide a “kick-back” to certain employees within the organization. Further, do not allow only one person to authorize vendors and process check runs, as these authorization and custodial functions should be separated to avoid the pitfalls mentioned above. Establishing a formal purchase order request form can also be valuable in this process, as management can follow the disbursement trail from origination by employee and identify the purpose of the cash outlay before a vendor is selected. This simple form should flow through the disbursement process and eventually be filed with the check voucher and related invoice support.
  • Board of Director Oversight. Consider reviewing the cash disbursement register at your regular board of directors or finance committee meetings. This will allow advisors of your organization to exercise proper oversight, decide if disbursements appear reasonable and ensure compliance with grant expenditure requirements, when applicable.


Payroll

  • Wage/Salary Authorization. Consider developing a brief compensation authorization form to approve all wage or salary changes that are entered into payroll by a clerk or controller. Further, consider providing your executive director with a current compensation breakdown of all employees by department on an annual basis to cast a second layer of review on the accuracy of these figures.
  • Formal Signoffs on Payroll Reports. Like any other control your organization has established, a formal signoff should be implemented to enhance accountability and overall visibility that the control has been implemented. Have an individual independent of the accounting department (executive director, finance committee member, treasurer, etc.) review payroll reports on a monthly or quarterly basis. Educate this person on typical employee levels, amount of new hires per period, and average gross wage/salary levels to analyze this report for variances or unusual fluctuations between months. This control will prevent the likelihood of compensation discrepancies and the threat of fake or “ghost” employees added to the payroll register.


Cash Receipts

  • Duty Segregation. For cash receipts, be sure that an individual independent of the accounting department (such as a receptionist or development personnel) is opening mail that contains checks and recording a brief summary of the number of checks and respective amounts. A common mistake is that incoming mail containing checks is given directly to a controller or clerk who is also responsible for preparing the bank reconciliation, increasing the likelihood that a check could be confiscated. Separate these custodial and record keeping functions to minimize this risk.

Implementing a few simple changes to your organization’s processes can generate a worthwhile upgrade in the control environment and further prevent fraud.

Contact Ryan Boylan, CPA, at rboylan@cohencpa.com or a member of your service team to discuss this topic further.