Internal controls are important for both nonprofit and for profit organizations. Simple, yet effective internal controls prevent losses, theft, and mistakes. While it may seem as if you are being overly cautious, even the most honest employees can be prone to temptation when lax security and internal controls are the norm.
Situations Requiring Internal Controls
Some nonprofits may need internal controls at charity shops, boutiques, or retail outlets that sell members goods, books and so on. Others may need internal controls only when hosting charity events or fundraisers. Evaluate your nonprofit’s needs and list the situations calling for internal controls. Then consider these situations and suggestions for internal controls.
* Cash deposits: Nonprofits that run thrift shops and charitable stores to raise funds for their operations should treat cash deposits the same way that a retail store would treat them. Keep cash registers locked. Always have an employee near the register to guard against theft. Set a limit on how much cash is stored in the drawer. Have a strict policy in place for how register drawers are counted out and stored at the end of the day or end of shift. A manager or other senior staff member should be the one to take deposits to the bank, and two people should be present at all times when cash drawers are counted.
* Check storage: Checks received as donations, payment of membership dues and the like should also be treated like cash and stored with good security. It is not uncommon for checks to be lost or stolen at places with lax internal controls. Establish protocols for recording checks immediately upon receipt. Place them in a safe and limit access to the safe to managers or only the few people in the accounting department who need them. Designate bank drop days and times to deposit checks in a timely fashion.
* Petty cash: Petty cash should always be kept in a safe or a locked drawer. Implement a policy in which at least two employees must be present at all times to count out the petty cash. Record petty cash amounts in a receipt book. Sign cash in and out, and do not make exceptions to this policy.
* Events: Fundraising events, raffles and carnivals tend to generate cash and small bills which are easy to overlook. Volunteers should store cash at the event in a lock box until it’s time to finish the event. Train volunteers and workers to never leave cash unattended at the booth or table. Instruct them to place all cash into the secure box or official cash register, never in their pockets or purses. Reconcile ticket sales with cash that night before everyone goes home to make sure no one has made mistakes.
* Payroll: Fraud occurs in payroll as well as with cash receipts. Employees may tag a little extra time here or there to their payroll accounts so that it adds up to overtime. To prevent payroll padding, ask managers to pre-approve overtime and sign off on time cards.
The old adage to trust, but verify, is very important for nonprofit internal controls. Although it may feel as if you do not trust your employees or volunteers, often having internal controls in place is enough of a deterrent to prevent problems. Employees typically appreciate having internal controls in place since it prevents problems and inaccuracies that can reflect poorly on them as well. Internal controls are necessary at nonprofit organizations.
Welter Consulting helps nonprofit organizations bridge the gap between people and technology. Software support, implementation and training, as well as audit support, are our main areas of service. If you would like assistance with your nonprofit accounting needs, please call us at 206-605-3113 or email us at welter-conssulting.com.