How Your Nonprofit Can Improve Its Internal Controls– October 18, 2016

Posted by Nathan Kreutzer, CPA, MBA

An effective internal control system is the backbone of any successful organization. For nonprofits, who often have few staff members on the payroll, maintaining a strong internal control system can be a challenge. Roles easily become blurred and the segregation of duties are difficult to maintain.
While every organization is unique, below are some general principles that can be applied to improve any internal control system.

  • Set the tone at the top. It’s critical for leaders of your organization to stress the importance of ethical business practices and compliance with laws, regulations and funding restrictions. Consistent and constant communication of ethical standards and the importance of the internal control system keeps these issues top of mind with your employees and makes them more likely to buy in to the goals of the organization.

  • Emphasize the importance of segregating duties. In a small organization, roles tend to blend as employees work towards common goals. Often, the segregation of duties is unintentionally violated by well-meaning employees. It is important for everyone in the organization to understand how control processes are designed — and why they are implemented — to maximize their effectiveness.

  • Have a written internal control policy. In line with having a good tone at the top and stressing the segregation of duties, it’s a best practice to write down your policies and procedures in a manual, outlining everything from payroll and disbursements to collection of funding sources. Formalizing these policies demonstrates the importance of your internal control system and helps ensure continuity as employees leave and new ones come on board.

  • Keep the finance committee involved. Your board should include several individuals with accounting and financial knowledge, and they should be actively involved in regular board meetings. A detailed review of financial data as well as periodic review of the internal control system can flag potential issues before they occur and keep the organization in good financial standing.

  • Use automated controls when available. Many controls can be automated using existing programs. For example, you can require electronic supervisor approval to process a purchase order through the system, or have payroll reports sent directly from the third-party payroll provider to the controller for review before checks are made available.

Effective and consistent internal controls are critical for any organization large or small, but especially for nonprofits with employees wearing many different hats. Make it a part of your standard operating procedure to regularly review and enforce the controls in your organization.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.