Without strict nonprofit internal controls, it’s easy for someone to abuse your funds and take advantage of donors and the organization.
Stories about nonprofit fraud have unfortunately become all too common in the media. However if a nonprofit implements strict internal controls, fraud can easily be prevented.
Public Relations Nightmare
Take for example the Douglas County, Kansas branch of Just Food. In August of 2015 it came to light that their, now former, Executive Director (Name Withheld) had taken the nonprofit for quite a ride, including embezzling at least $52,000 and neglecting to pay at least $60,000 in payroll taxes.
The news of the Executive Director’s misdeeds hit the press and immediately the nonprofit had a black-eye. Questions about board accountability arose, why hadn’t they kept a closer eye, what about all of the money that had been donated? It was a public relations nightmare. This sort of press could easily ruin a nonprofit if not handled properly.
However, the board of Just Food was quick to react, instead of hiding from the press and the public, they spoke with them about their plan of action to make sure that the nonprofit could recover from the disaster. Having strict nonprofit internal controls in place could have saved this organization the embarrassment and public distrust caused by one dishonest and greedy employee.
Building Public Trust
Internal controls are financial management practices used to prevent misuse and misappropriation of assets, such as theft or embezzlement. Typically, internal controls are described in written policies that describe the procedures that the nonprofit follows as well as who is responsible.
Internal Controls are about trust building. The goal is to create “checks and balances” on staff and board members or outside vendors to reduce the risk of misappropriation of funds/assets. Once trust is lost then it is expensive and time-consuming to rebuild it among donors, employees and the community.
Internal Controls are a series of actions to get a specific result, such as:
- Achieve objectives in an efficient and effective manner
- Provide reliable financial reporting
- Comply with laws, regulations and policies.
- Prevent wasteful spending
- Prevent fraud or embezzlement of funds
- Prevent “cooking the books” and misleading financial reporting
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Defense Against Risks
A strong internal control system will have controls in place to defend the organization against risks:
- Control Environment: Determines whether the organization is committed to high levels of integrity and demonstrates those values.
- Risk Assessment: Determines whether a non-federal entity is a safe bet to complete the objectives of a federal award. Ensures that the organization has plans in place to identify, analyze and respond to a variety of risks.
- Control Activities: Where actual tasks that can minimize waste, fraud and abuse are put into place. This mechanism will prevent and detect bad things from happening.
- Information and Communication: Quality communication and improving the reliability of financial information. Reducing or eliminating spreadsheets and using a common software platform.
- Monitoring: Ensures that your organization is following the requirements of a sound internal control system.
Examples of Internal Controls
Here are some ways your nonprofit can implement strict internal controls within your organization and prevent fraud and abuse:
- Policy that requires two signatures on a check.
- Segregation of duties requiring that the person who enters checks received in the mail is not the same person who is responsible for depositing checks. Also, the person who prepares the payroll timesheets should not prepare the payroll and distribute the payroll checks.
- Periodic review of the list of vendors receiving fees/checks from the nonprofit to prevent payment to fictitious vendors.
- Policy to keep all cash in locked drawer and deposit cash and checks in the bank as soon as they are received.
- Policy requiring employees to be reimbursed only for expenses that are approved in advance, in writing.
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Bottom Line
A top priority for any nonprofit is to address who has access to the nonprofit’s bank accounts and who has authority to spend money on the nonprofit’s behalf, whether through check, cash, credit card, or some other means.
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Did you find this article useful? We welcome your thoughts and comments.
I have work in nonprofit finance for three decades and endorse financial transparency at all costs. I believe the healthiest nonprofits limit the number of years in a term and number of times an individual can serve on a board and as an officer of a board. Organizations that have board members serving since the founding of the nonprofit should be viewed with significant suspicion.
Reimbursing employees for expenses approved in advance, in writing is a good thing. However, what if the employee makes $20,000 to $30,000 annually and reimbursement is time sensitive? Does the amount of time “in advance” become malleable?
Thanks for your comment and insight. Not sure what the relationship is between an employee’s earning and their expense reimbursement? And no, I don’t think the in advance time is malleable.