In the nonprofit sector, maintaining accountability and transparency is vital. Internal controls and separation of duties play pivotal roles in achieving this goal by safeguarding assets, ensuring accuracy in financial reporting, and complying with rules and regulations.

Internal Controls

These are typically written policies establishing procedures for people operating a nonprofit to follow. The goal of internal controls is to create checks and balances for the nonprofit volunteers, staff, management, and board of directors.

Separation of Duties

Separation of duties within a nonprofit ensures more than one person is in charge of essential activities.

General Goals

  • Separating tasks such as authorization, custody, and recording of financial transactions to reduce the opportunity for individuals with access to commit and conceal fraudulent activities.
  • Including more than one individual when recording or processing transactions to increase the likelihood that errors will be detected and corrected promptly.
  • Ensuring that no single person has unchecked control over significant financial activities to promote accountability.

Examples

This can be as simple as requiring authorization of vendor payments, having a second person review the bank statement, reconciling the bank statements, and locking the check stock. For small nonprofit organizations, internal controls and proper separation of duties are difficult due to limited personnel. Smaller nonprofit organizations can apply mitigating controls, or high-level less-frequent oversight.

For example, a bookkeeper signing checks is not ideal for internal controls but may be the most practical for smaller nonprofits. Having someone other than the bookkeeper reviewing the bank statement each month mitigates some of the risk.

Implementation

To implement effective internal controls and separation of duties, it is best to assess processes, document policies and procedures, and provide training. Conducting a thorough assessment of existing processes can find vulnerabilities and identify areas for improvement. Documenting policies and procedures ensures that roles and responsibilities are well defined and understood by all individuals involved. Regular oversight can also help identify any deviations or weaknesses in the system.

Please reach out to a member of KT’s Nonprofit team if you need assistance with your organization’s internal controls.