Effective use of resources and proper financial accountability can be attributed to the result of a nonprofit’s strong internal control process. With that said, internal controls can be more about doing things for your nonprofit’s sake, rather than simply meeting the requirements or expectations of an industry watchdog or regulatory agency.
While there may be a dozen or more reasons why your nonprofit should adopt internal controls, the most compelling is to assure donors and board members of the following:
· Accountability: resources are used in compliance with grant agreements, laws, regulations, and policies
· Fraud Prevention: resources are safeguarded against waste, loss, and misuse
· Efficiency: reporting is reliable and that data is obtained, maintained, properly classified as to function so accurate compliance reports are submitted to regulatory agencies in a timely fashion
It is vitally important to design your system of internal control to achieve the objectives of (1) effectiveness and efficiency of operations, (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations. Specifically, accounting controls should ensure the following in a nonprofit organization:
· Transactions are executed in accordance with management’s general or specific authorization and recorded to permit preparation of financial statements in conformity with GAAP or any other criteria;
· Access to bank assets is permitted only in accordance with management’s authorization;
· Expenses and costs are tracked and reported by grant and function;
· Indirect costs are allocated to grants and programs on a fair basis that can be justified to funding sources (have your major governmental funding sources approve the allocation basis in writing);
· Restricted resources are individually tracked and reconciled on a regular basis.
Simply stated a strong system of internal control (both in its design and compliance) is good business for all nonprofit organizations.
Important Tip! | Management should identify and cure internal control deficiencies before your auditors arrive.
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