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October 25, 2020
Financial Controls Help Board Members Keep Nonprofits on Track
By Andy Robinson and Nancy Wasserman

Andy Robinson and Nancy Wasserman
Andy Robinson and Nancy Wasserman
Financial controls provide a critical tool that enables nonprofit board members to do their job, and the lack of appropriate controls—to handle and track funds—can lead to money being misdirected or embezzled, setting the stage for organizational distress or even dissolution.

Think about all the ways your nonprofit can receive, hold, or spend cash: grant payments, bank accounts, credit cards, and so forth. Financial controls help ensure that everything is properly accounted for and that the organization properly employs its funds.

Effective financial controls have three attributes: they ensure safe care of your assets, divide responsibilities among several people, and are fully disclosed to, and understood by, all concerned parties.

The First Principal of Financial Controls Is to Assure Custody of Assets
This is done by creating strong physical controls in the workplace. All your cash and the means of transferring it—checks, bank account numbers, passwords, petty cash, credit card numbers, and even the cards themselves—should be locked up.

And we’re not just talking about physical assets, such as credit cards. Secure your computers— especially those containing financial software—with passwords and restricted access. Use lockouts to close computer programs when staff members are away from their desks. Back up important data regularly and store it off-site.

The Second Principle of Good Financial Controls Is Separation of Duties
This ensures that multiple people are involved in most transactions, making it harder for someone to run off with the money. Smaller organizations commonly ignore this principle, which can lead to disaster.

A sad-but-true story: a parent-teacher organization was raising money for a middle school field trip through the usual means: bake sales, car washes, and raffles. One volunteer parent handled all financial duties, including depositing cash and reconciling the bank statements. When she needed money for personal expenses, she secretly borrowed from the account, then paid it back. After a while, she stopped paying it back. By the time the crime was discovered, this well-meaning volunteer had stolen $10,000 and the field trip was cancelled.

How did this happen? No one else ever looked at the bank statements.

To create appropriate separation of duties, many organizations require board approval for expenditures above a certain amount. They may also require two signatures on checks. (Beware: banks sometimes disregard your two-signature policy and will cash the check anyway.)

If the bookkeeper prepares checks to pay the bills and records payments, a second person should sign the checks. Ideally, a third person should receive the unopened bank statement (or have a unique password for online access) to reconcile the account. In small to mid-sized organizations, that third person is often the volunteer treasurer.

In cases where the executive director or finance director prepares financial statements, the finance committee or treasurer should review the numbers before presentation to the full board. These outside eyes often find discrepancies: “How come our travel expenses tripled last month?” or, “We have $4,000 in miscellaneous expenses; what does that mean?”

Separation of duties should be incorporated into your entire chain of financial actions, from authorizing, executing, and recording expenditures through receiving, recording, and depositing income. Ask yourselves: In our organization, where are the weak links in the chain? Where are our assets most likely to be lost or stolen, and how do we separate duties to better protect ourselves?

The Third Principle of Good Financial Controls Is Transparency
In exchange for serving the public good, nonprofits are exempt from most state and federal taxes. Because your group literally belongs to the community, your IRS returns and other government filings are public information.

Like it or not, everybody knows your business. Smart organizations embrace this reality and use it to their advantage. For example, many organizations receiving high marks on rating services such as Charity Navigator—these services evaluate your nonprofit, in large part, by reviewing your government paperwork—tout their scores to show that they use money efficiently.

Begin by clarifying who does what, so everyone on staff and board understands your financial system. Create a flow chart or map showing how money moves through your organization, both in and out, and who is responsible at each stage, similar to the one shown here.

An outside accountant can help you build a culture of transparency within your organization. Accountants often raise concerns about your financial management systems, share those concerns with leadership, and assist you in making corrections and improvements. By conducting an audit certified by an accountant, you announce to the world that you strive to manage your finances effectively, you welcome professional scrutiny, and you have nothing to hide.

As a board member, your job is not to manage the system, but to oversee the policies that ensure all the necessary pieces are in place.

This article is excerpted from The Board Member’s Easier Than You Think Guide to Nonprofit Finances, by Andy Robinson and Nancy Wasserman. Published by Emerson & Church. All rights reserved.
February 2012
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