He may be your most trusted employee, someone who has been with your organization for years. Nevertheless, no one should be exempt from internal controls. Not even the CEO of your nonprofit should be allowed an exception to the controls put into place to safeguard your nonprofit’s financial integrity.
Although nonprofits tend to attract trusting (and trustworthy) sorts of people, according to figures reported on GuideStar, the median loss to fraud at nonprofits is $100,000. That’s a lot of money that could be better spent helping your organization achieve its mission rather than helping Mr. or Miss Thief buy luxuries.
People are often surprised when learning the identity of the person who committed the fraud. “I never thought she would do something like that!” or “Him? He’s the most loyal employee I know!” are common refrains. Fraud often occurs when people succumb to temptation. It may be spur of the moment or planned, but it doesn’t exist in isolation. Fraud happens because situations are favorable for theft.
Locking the Virtual Door
Would you leave your door unlocked when you leave your house to go to work? Of course not. It’s not that you don’t trust or like your neighbors. You may live in a beautiful neighborhood surrounded by lovely people, but that’s not the point. An open door is an invitation for thieves to come in and enjoy themselves. A locked door discourages casual entry and provides a simple barrier that turns thieves away.
Similarly, your nonprofit must create its own “locked doors” in the form of internal controls.
Internal controls consist of the steps, policies, and procedures enacted around the handling, storage, and recording of money. Safeguarding assets as well as ensuring accurate data (recorded transactions and financial information) are two critical steps to prevent nonprofit fraud.
Guidelines for Internal Controls
The general guidelines for internal controls include a clear separation of duties, accountability, and transparency.
- Separation of duties: Different people should be assigned the responsibility of recording transactions, authorizing transactions, and maintaining control over assets. For example, the person who locks the cash box in the safe should not be the same person who records all the transactions. The person who can authorize a return at a charity shop should not be the same person who is authorized to open the register and remove the money at the end of the day. Keeping duties separate ensures that one person alone cannot be tempted to take the money and cover it up by altering the records. It puts into action a sequence of checks and balances against the finances that should catch any mistakes or at least deter people from considering theft.
- Accountability: Audits are a great way to ensure accountability. An official annual audit should be supplemented by ad hoc, unannounced audits to discourage fraud. Another aspect of accountability is record-keeping. Clear, consistent recording of financial information is vital for accountability. Make sure that all accounts receivable are updated daily, and that bank deposits are made promptly. Do not leave checks in drawers waiting for deposit day. The same goes for cash boxes; have an additional person present when cash boxes are opened, and petty cash is counted or distributed. Each of these steps improves accountability.
- Transparency: All policies regarding internal controls should be documented in writing. Staff must be trained on such policies and reminded of the exact policy if adherence becomes lax. Lastly, enact a confidential reporting mechanism in which people can alert management if they discover fraud. Take all reports seriously and follow up on them promptly.
It may seem like an unnecessary layer of bureaucracy to enact these procedures, but as they say, an ounce of prevention is worth a pound of cure. How much is an hour or two of your time worth? Surely it is worth more than $100,000, the median amount lost to nonprofit fraud every year. Take an hour or two now to enact internal controls and prevent nonprofit fraud.
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.