top 5 internal controls for nonprofit organizations...top 5 internal controls for nonprofit...

Themes

Set the tone from the top for ethical behavior.

A nonprofit is a public entity with responsibility to the entire

community and all taxpayers. You will be held to this standard.

Share responsibility among the Board, Executive Director, senior

managers, and other staff.

Enlist the Board’s help in establishing segregation of duties and

regularly monitoring financial results.

Top 5 Internal Controls for Nonprofit Organizations

1. Reconcile agency bank statements every month

• Reconciliation must be done by someone without check signing

privileges

• Reconciliation must be done by the end of the following month

(1/31 for the December reconciliation)


1. Steps for bank reconciliation review

• Examine canceled checks for known vendors

• Examine bank statement and outstanding check list for checks

issued out of sequence

• Examine bank statement for incoming and outgoing wire

transfer activity

• Compare cash ins and outs to expectations

• Initial and date the review and save it


2. Honor donor restrictions

• Develop and maintain a system to record restricted gifts and

grants

• Donations may be purpose-restricted or time-restricted

• Larger organizations will use financial accounting software to

track restricted and unrestricted net assets

• Small organizations may use fund accounting or excel

spreadsheets to account for the release of gift and grant

restrictions

Donor Restrictions

Ms. Charity makes a $5,000 donation to the Youngstown Food Pantry. The

check is accompanied by a letter stating that the donation is to be used for

meals for school children. The donation is considered to be purpose

restricted.


check is accompanied by a letter stating that the donation is for next school

year. The donation is considered to be time restricted.


check is accompanied by a letter thanking the pantry for its good works.

Management decides the funds will be used for the building campaign. The

donation is not considered to be restricted, but has a board designation.

Donor Restrictions

Ms. Charity sends a signed $5,000 pledge card to the Youngstown Food

Pantry. The pledge is accompanied by a letter stating that the donation is to

be used for meals for school children. The donation is considered to be

purpose restricted.

Donor Restrictions

Over lunch, Ms. Charity tells a Youngstown Food Pantry board member

that she intends to give $5,000 to the Food Pantry, to be used for meals

for school children. The donation is considered to be purpose restricted.

Actual pledge letter received:

“I want to take this opportunity to confirm my unrestricted pledge of $100,000 to

the Youngstown Food Pantry in support of the Building Campaign. I intend to

pay this pledge over three years beginning in 2016. Should you fail to reach

your stated campaign fundraising goals, I reserve the right to suspend payment

on my pledge and restrict any funds that I have paid to the Food Pantry for a

purpose of my choosing.”


3. Require meaningful approvals for all expenditures

• Allow Program Managers and mid-managers to approve

expenditures related to their budget responsibility

• Do not allow the Executive Director to approve every expenditure

• Expenditures over a certain dollar amount (approximately 1% of

total budget) should require Executive Director approval

• Require the Board President or Treasurer to approve the Executive

Director’s expense reimbursements

• Never allow anyone to sign a check payable to themselves

• A meaningful system of approvals eliminates the need for two signers


3. Require meaningful approvals for all expenditures

• Lack of controls vs.

• Override of controls


4. Prepare and review regular budget to actual variance reports

• Budget

• Forecast

and

• Financially report


4. Prepare and review regular budget to actual variance reports

(Assumes you have prepared a budget)

• Larger organizations ( >$500,000) should prepare monthly

• Smaller organizations can prepare quarterly

• Share the variance reports with everyone on staff with budget

responsibility

• Share the variance reports quarterly with the Board or the Finance

Committee of the Board

• Require written explanations for significant variances (define)


5. Comply with grant and contract reporting responsibilities

• Stay ahead of government contract compliance obligations

• Assign one staff person overall responsibility for compliance with

each grant and/or contract

• Assign a second staff person to monitor compliance with all grant and

contract reporting deadlines


5. Comply with grant and contract reporting responsibilities

• Examine relative importance of funding sources to your overall

budget

• Allocate compliance resources accordingly

• Review staff time spent on compliance and reporting


6. Use a payroll company

Do not go it alone on payroll. The smaller the organization the more reliant

it should be on a reputable payroll company to file all reports.

Themes


Consistent, meaningful review of financial information at every level

1. Board of Directors

Finance Committee

Audit Committee

Full Board

Themes


2. Executive Director

Know what you don’t know

Ask questions

Get comfortable with numbers

Analytical Review

Themes


2. Senior management

Budget, Forecast, Review

Accountability for financial results

Budget line item accountability

Policies & Procedures

Nuts and Bolts

Don’t get hung up on language

Okay to identify individuals by name

Use a shared folder and document track changes

Annual updates and review of policies to coincide with annual

audit

Make one individual responsible for overall maintainence of

policies


Written procedures document transaction cycles

• Cash disbursements (checks, credit card charges, purchase orders?)

• Cash receipts (deposits of gifts & grants, credit card payments, sales)

• Payroll (use a company, still requires oversight)

• Bank reconciliations

• Journal Entries (changes to the general ledger)

• Lines of Authority (who approves what)

• Budget, Forecast, Financial Reporting (how often, preparation &

review)


Sample Policy

Payroll


Resources

top 5 internal controls for nonprofit organizations...top 5 internal controls for nonprofit...

Documents