Internal Controls for Non-Profit Organizations

In today’s increasingly transparent world, it is critical that non-profit organizations institute a solid set of internal controls to safeguard assets and protect themselves from theft, fraud and/or waste.

Though this topic can be difficult to discuss where so many willing and helpful volunteers offer their time and talent for little to no financial compensation, it must be addressed for the sake of the mutual honesty and trust of the organization, its members and its donors.

There are three basic financial activities that should be considered when implementing internal controls: authorization of transactions, recording of transactions, and custody of assets. A few related internal control suggestions follow:

Concerning authorization of transactions:

– A minimum of 3 different individuals should have check signing authority

– All checks should require 2 signatures

– A single overseer should be responsible for managing a petty cash fund that will be used for all non-check payments

– Vendor checks should only be issued on approved invoices

– Check signing should not be performed by the individual with the authority to establish wage rates and setup payroll accounts

Concerning recording of transactions:

– Cash receipts should be recorded immediately and deposited daily

– Bank accounts should be reconciled monthly by an impartial third party

– Supporting documents should be cancelled upon payment of approved invoices

Concerning custody of assets:

– Record keeping for assets should not be performed by the individual with physical custody of the asset

As can be drawn from the examples listed above, the most important aspect of internal controls for non-profits is appropriate separation of duties. Though most non-profits have a small accounting staff, you must try to engage different individuals for the sake of checks and balances (and rotate periodically, when possible).

Ultimately, accounting consultants can offer extensive knowledge and expertise to help you design a system of internal controls to meet your specific needs.