There’s a special word for people who steal from nonprofit organizations. We won’t repeat it here, but it’s pretty special. One of the ways in which nonprofits can protect themselves from risks both within and without is to implement strong internal controls.
They are used to protect all assets, tangible and intangible, as we’ll see below.
- Protecting Financial Assets
Internal controls play a major role in protecting nonprofits from theft, fraud, and mismanagement. This is because thorough reviews conducted regularly can spot risks a mile away, giving nonprofits time to take evasive action. These are preventative controls.
Detective controls come into play after the event. They determine the what, where, when, and how so organizations can implement firmer preventative controls to avoid these risks in the future.
Internal controls include physical preventative measures (locks on safes) and financial preventative measures (restricted access to financial reports).
Internal controls typically include inventory checks for missing assets, and segregation of duties to prevent one person from setting themselves up as Lord of Financial Transactions who holds approval in the palm of his hands.
- Ensuring Financial Integrity and Accuracy
Because an NFP’s finances are often managed by part-time staff or bookkeepers rather than accountants, reports might not be as structured as they could be. Internal controls provide the structure needed to monitor funding, ensuring resources are properly allocated, while also ensuring transactions are correctly recorded. This promotes accuracy and transparency across the board.
Accuracy and transparency breed integrity and integrity is exactly what NFPs must convey. If they want to maintain their reputations and build mutually beneficial relationships with stakeholders and donors, that is.
Few nonprofits want to ruin their reputations because of some errors in payroll. That’s why regular reviews are so important. Positive reviews foster trust within the community as well as volunteers, stakeholders, and donors.
- Preventing Fraud and Misuse of Funds
Do you know what fraud does? It ties you up in endless legal processes. And it results in financial loss, of course. You can save yourself a trip down that particular rabbit hole by implementing some simple preventative controls. For example, segregation of duties and strict authorization processes slam the door on opportunities to commit fraud.
Block sneaky entry by making it a requirement for two people to authorize financial transactions above a set amount.
When you close a door, a window of opportunity opens. Not really, but your NFP is never going to be completely fraud-proof. That’s why internal audits, bank reconciliations, and monitoring are so important. They highlight discrepancies, so you can immediately stop mismanagement, theft, or fraudulent activity and devise new measures to prevent events from recurring.
- Promoting Regulatory Compliance
Nonprofits might not be subject to exactly the same regulations and legislation as your typical business but that’s because they’ve got a whole bunch of them unique to NFP operations. This includes a special set of financial reporting standards and IRS guidelines.
Internal controls, which includes documenting all internal controls, is essential to ensure compliance with legal requirements and regulatory bodies. It’s something NFPs must take seriously because an error here or there could result in severe financial penalties or loss of their tax-exempt status.
Regular internal audits keep your organization within the letter of the law, while internal reviews ensure you comply with required financial practices.
- Building Trust and Transparency with Donors
We’ve mentioned transparency and its importance in building trust with stakeholders. Well, here it is again. Internal controls that lead to accurate financial reporting show stakeholders that you’re more than capable of directing funding to programs and initiatives that align with the organization’s mission.
Transparency also demonstrates financial responsibility, which inspires donors to commit to regular (monthly) contributions. It also facilitates long-term relationships with donors who are proud to support your organization.
Here, you have to step away from internal audits and invite reviews from independent parties. Independent audits that support your results are a surefire way to assure donors of your integrity, trustworthiness, and skill. It also helps to attract new donors who have the potential for long-term relationships.
- Enhancing Operational Efficiency
Internal controls are full of benefits. For example, they streamline financial processes, enabling nonprofits to allocate resources to where they’ll do the most good. Control measures that keep an eye on operations, like operating budgets, ensure that financial decisions support an organization’s goals, values, and mission.
Sage accounting software boasts automation and AI features, which is great because they’re everywhere, including internal controls. For nonprofits, automation reduces human errors and takes on mundane, repetitive tasks so that staff are free to focus on the mission. Automated payment systems also reduce the risk of errors creeping into payroll records.
Finally, internal controls can provide an accurate performance assessment that identifies processes that are not running as efficiently as they could. NFPs can make the adjustments necessary to optimize operational efficiency.
NFPs are vulnerable to theft, fraud, and accidental financial mismanagement. Not only does this risk their financial health, but it also places communities at risk because they no longer benefit from the organization’s services.
However, internal controls can help them avoid financial risk and even boost financial performance enabling them to attract more donors and extend their reach.
