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Under Control: Proper financial controls can protect your nonprofit
By Bob McMahon, CA
October 26, 2009

The executive director didn't have an inkling.
The volunteer team had just celebrated a successful fundraising event that brought $20,000 into their nonprofit - or so they thought. When the ED reviewed the bank deposit, however, only $15,000 could be accounted for. As group members traced back their actions to determine where the missing finds might be, it became apparent that numerous people had access to the cash and cheques that were collected - and it was likely that someone took advantage of this opportunity.
If the organization had a simple system of financial controls in place, this problem would likely never have happened.
Protecting assets from fraud and theft is only one reason why nonprofits should set up financial controls. Other important reasons: controls protect organizations from errors, inefficiency, and waste. They also provide stakeholders with assurance that an organization is accountable and following responsible procedures. As well, they protect management and the board from liability. Bottom line: financial controls enable nonprofits to succeed at what they do best - carrying out their missions.
Every nonprofit - no matter how small - should have a reliable system of financial controls. Proper procedures don't have to be complicated or costly; often the simplest procedures can be the most effective. Following are examples that may point out vulnerabilities in your organization and help to safeguard assets.
Segregate duties
There are four general types of financial activities common to nonprofits: authorizing, executing, recording transactions, and holding assets. When a small nonprofit has one person handling more than one of these activities, there is high potential for mismanagement of funds. By making each activity related to the authorization, execution, recording, and custody of funds and other assets the responsibility of different individuals, you can substantially reduce the risk of misappropriation of funds. You should, for example, separate responsibilities between:
the person who records transactions and the person who is responsible for purchasing;

the person who handles accounts payable and the individual who signs cheques; and

the person who records invoices and accounts receivable and the person who opens the mail and makes bank deposits.
For very small nonprofits with few staff members or volunteers, achieving perfect segregation of duties may not be possible. In these situations, management and the board of directors should weigh the costs and benefits of implementing certain controls to determine which ones are key for your particular organization.
Properly qualify and train staff
To ensure that staff members conduct financial activities appropriately, it's important to ensure that responsibilities are clearly defined, that the individuals involved are capable of handling these responsibilities and that they receive the appropriate training.

When hiring someone who will be involved with financial transactions, always verify credentials and check references.

Document the organization's financial controls in a procedures manual and provide training and orientation to incoming staff who will be handling transactions.

Establish a refresher training program and regularly assess personnel to ensure they continue to have the necessary skills to carry out their responsibilities.

Prepare and monitor a budget
Preparing an annual budget and monitoring it on a monthly basis is a key component of effective financial management. In addition, at least quarterly, the board of directors should compare actual and budgeted amounts for the current period to ensure that revenue and expenses are in line and to identify any discrepancies.
Establish a transparent purchasing process
Having a clear and complete purchase tracking process – from approval, through delivery to final payment – will not only prevent problems, but also enhance efficiency.
Document authorization for placing orders and contracts, including who is authorized, under what circumstances and the maximum amount; communicate this policy to all staff members and relevant volunteers.

Verify that purchases have been properly authorized, and that the appropriate goods or services have been received by:

requiring the treasurer or a member of the management team to approve purchases over a specified amount;

using pre-numbered purchase orders where possible and appointing a person other than the purchaser to approve these;

requiring suppliers to submit detailed invoices for goods and services;

appointing someone to verify that goods received correspond with orders; and

scheduling regular inventory counts.

Secure incoming funds
For many nonprofits, donations come from many sources, raising the risk of errors and omissions. Thus it's important to put into place controls that keep money safe and that demonstrate your organization's commitment to doing so. For organizations that receive donations in the mail, ensure the security of these funds by:
appointing two trained, reliable people to open mail immediately and record cheques;

appointing another person to verify entries; and

rotating these duties where possible.
For fundraising events, you should maintain separate records for each event, including a breakdown of all costs and receipts. If the event will generate revenue from ticket sales, implement the following precautions.

Use pre-numbered tickets.

Record every ticket sale, including the number of the ticket with the corresponding name and address of each purchaser.

Reconcile receipts with tickets sold.
Receipt books should be stored in a secure location for which a member of management holds the key and individuals should be required to sign for these books.
Follow safe banking procedures
Cash is appealing; reducing temptation requires promptly placing funds in a secure location. Deposit cash and cheques the same day as they are received. If this is not possible, they should be placed in a locked container whose key is held by a member of the management team. Other safe banking procedures include:

having the treasurer or a member of the management team receive bank statements and review them for unusual transactions prior to passing them along to the bookkeeper for reconciliation; and

storing bank statements and cancelled cheques under lock and key.

Protect Payments
Proactive accounts payable practices such as the following can also strengthen the protection of assets.

Document and communicate authorization for signing cheques; require two signatures on all cheques above a predetermined amount.

Ensure that all cheques are pre-numbered and that blank cheques are stored in a locked area that is under the safekeeping of someone other than the accounts payable person.

Require the accounts payable person to sign for blank cheques and to record the numbers of the cheques.

The treasurer or a member of the management team should review supporting documents (such as original invoices, purchase orders) before signing cheques and should stamp these documents "paid."

Cheques should be mailed as soon as they are signed by someone other than the person who prepares the cheques.

The petty cash fund should have a specified maximum transaction amount and receipts should be required for purchases made from that account.
Do not permit the signing of blank cheques or cheques made out to "cash."

Secure Fixed Assets
To ensure the safekeeping of fixed assets such as land, buildings, equipment, furnishings or vehicles, document these assets, especially those that have been donated, and update this list on a regular basis.
It is also important to ensure that assets are physically secure to deter theft or damage; this is especially relevant for an organization's file server and computers.
Preserve Investments
To protect your organization's capital, the following procedures can help to safeguard investments.

Document a clear investment policy and share this with all members of management and the board so they can ensure it is implemented. Keep in mind that directors should also assure the diversification of investments to protect the financial integrity of the organization.
The treasurer should verify that all dividends or interest payments are received as expected and that investment purchases and sales are properly authorized.

Maintain, in a secure location, complete records of all investments purchased, held and sold.

The treasurer or board of directors should regularly review statements of investment performance.

Guard Financial Records
Financial records - whether manual or computerized - are vulnerable to manipulation, thus it's crucial to establish a level of protection through procedures such as the following.

Establish passwords for all users and all computers.

Restrict access to financial data and establish additional passwords for financial software and spreadsheets.

Establish a regular computer backup routine and off-site storage; regularly test this back-up to ensure it is working properly.
Internal controls are an investment in vigilance more than a financial investment and can be adapted to suit the circumstances. Thus they are practical for even the smallest organizations. Consult with a professional accountant experienced with nonprofits and charities to determine the controls that would be most valuable for your organization's specific needs.
Be sure to document your financial controls in a procedures manual and ensure that all staff members, the board of directors and relevant volunteers are familiar with its contents.
With growing competition and public scrutiny, every dollar a nonprofit raises is precious. You can demonstrate to your funders and other stakeholders that your organization practices responsible stewardship of resources by implementing a preemptive system of financial controls.
Bob McMahon, CA, is a partner of BDO Dunwoody LLP. He provides auditing, accounting and advisory services to nonprofit, private and public organizations. You can reach Bob in the Mississauga office at (905) 270-7700 or bmcmahon@bdo.ca.