Pacific Business News

June 16, 2006

Solid internal controls will help nonprofits protect their assets

by Sally Little

Nonprofit organizations should safeguard their assets by creating comprehensive and enforced internal accounting controls.

Internal controls are methods, policies and procedures that insure that transactions are authorized, valid, complete and accurate. They should be developed by management in accordance with generally accepted accounting principles, available to all staff and integrated into their daily work.

Large nonprofits generally hire an internal auditor whose sole responsibility is compliance with and enforcement of the internal controls. This person usually reports to the CEO/executive director and/or audit committee.

Midsized and small nonprofits usually do not have the financial resources to hire an internal auditor, and they may or may not have a separate audit committee. In these instances the finance committee and the board of directors along with the CEO/executive director provide oversight for these controls.

The following tips will help evaluate the effectiveness of your internal controls.

* Segregate duties. No person should have control over a transaction from beginning to end. If youíre purchasing a computer, for example, there should be a separate employee responsible for ordering, receiving, writing and signing the check. Many nonprofits with minimal staff find separation of duties challenging. As a result, the staff may rely on board members to assume some of these tasks such as writing and signing checks.

* Establish responsibility. This is particularly important in determining who has purchasing authority and under what circumstances. For example, in a large nonprofit a program administrator may have purchasing authority within their department for budgeted equipment. In small nonprofits with minimal staff the board treasurerís signature may be required for these purchases. Most large capital purchases should require the approval of the board of directors.

* Require documentation. All disbursements should be accompanied by the corresponding receipt or invoice. Account payable documents should be pre-numbered to prevent a transaction from not being recorded or recorded twice. In addition, cash withdrawals should never be made via ATM cards.

* Safeguard restricted funds. For the integrity of any nonprofit, it is important that the board of directors enforce a policy that restricted funds only be used for their restricted purpose.

* Set check signing limits and signature requirements. This policy is the responsibility of the board of directors. Under no circumstances should the board of directors allow authorized persons to pre-sign checks. This defeats the purpose of providing due diligence in reviewing expenditures with its accompanying disbursement.

* Rotate employees and require vacations. This periodically provides a new set of eyes in examining your accounting processes. It is designed to prevent employee theft by making it more difficult for them to permanently conceal any improper actions.

* Create a relationship with the nonprofit. Ask the director of development for a tour of the nonprofit, learn about its programs and meet with the CEO/executive director and chairman of the board of directors. Review their organizing documents and From 990 as well as their annual report.

* Require a signing ceremony. Never transact your gift annuity agreement through the mail. Always make out your check or transfer funds to the nonprofit. Never make out your check or transfer funds to another entity or the director of development/planned giving. All reputable nonprofits will arrange a signing ceremony with senior staff members, the CEO/executive director and members of the board of directors.

* Review the auditorís management letter. The board of directors should periodically review these letters. They contain comments by the auditor on the adequacy of your internal accounting control structure, whether it is being enforced and recommended corrections.

* Consider outsourcing some accounting functions. A criti cal component of internal controls is reconciling entries in the general ledger to supporting documentation, reconciling the bank statements and closing the books at month end. These functions should be completed by an employee who is not responsible for accounts payable or receivable. This is often challenging for small nonprofits and outsourcing is an attractive option.

* Determine physical, mechanical and electronic controls. This includes the safeguarding of cash until deposits can be made in a financial institution. It also includes the purchase of a safe and a security system to prevent break-ins. Most importantly, it includes controlling computer access to specific files and limiting offsite access to your computer system. To prevent the theft of a laptop computer and the public exposure of confidential information, every nonprofit should have policy on who may take a laptop off the premises and what information may be stored on these computers.

* Purchase an employee theft insurance policy. No system of internal controls is perfect. In some cases the cost of establishing internal controls outweighs the benefit. As an overall precaution the board of directors should consider this insurance as it protects against crimes committed by employees such as the theft of money, securities or other property.

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