In any organization, there is the chance of money going missing between income and outgo. Financial or internal controls are the policies and procedures that minimize this leakage – and protect people handling the money from charges of fraud. Businesses tend to have internal controls because the owner is keeping track of profits (but not always – sometimes there is too much trust involved). Nonprofits need the same level of internal controls but small ones, in particular, are often reluctant to formalize how money is handled, especially if it implies a lack of confidence in the executive director.
Internal controls start with financial policies adopted by the board. These include the organization’s mission statement, an ethics statement, standards of behavior for board members and staff, conflict of interest policy, whistleblower policy, and a financial control policy. All but the last are standard governance documents. The Financial Control Policy doesn’t need to be complicated; it is a clear statement that the organization takes its fiscal responsibilities seriously. For instance:
Financial Control Policy
The Organization is responsible to its clients and donors to act as a good steward of funds in its control. As such, the Organization is averse to risk of all kinds. The Organization will follow best practices for managing its operations and financial controls, including setting up internal controls to safeguard its finances.
Internal controls implement the Financial Control Policy. They are the measures taken by the organization for the purpose of (1) protecting its resources against waste, fraud, and inefficiency; (2) ensuring accuracy and reliability in accounting and operating data; and (3) securing compliance with the policies of the organization. Control activities include:
- Approvals and authorizations
- Reconciliations of budget to actual
- Segregation of duties
- Verifications and audits
In simple terms, it means making sure that more than one person handles any money stream, such as donations or expenses. So one person might retrieve the mail from the mailbox, open the mail, record donations, and write acknowledgement letters, while someone else records the deposits and takes them to the bank. For expenses, two signatures on all checks (or all checks over some reasonable amount) are a good idea.
For the smallest nonprofits, finding enough people to handle the money can be a challenge; board members may need to be involved in some or all of the steps. And always, good paper trails are critical for demonstrating that all money has gone where it is supposed to; it not only reduces the opportunity for fraud, it protects the people handling the money, whether executive directors or board members. It doesn’t imply lack of confidence, it implies concern for an executive director. It also makes it easy to prove to donors that their money has been used as represented.
Very few board members enjoy setting up or enforcing financial controls, but almost no one enjoys the repercussions of having the organization’s money go missing, from pressing criminal charges to state investigations. It is worth taking the time and getting the advice to set up internal controls to protect your organization.