Internal control best practices for nonprofit organisations

Running a nonprofit is challenging and fulfilling. Nonprofits, like any other business, require robust internal controls to manage funds and operations effectively and ethically. 

These controls are measures designed to safeguard assets, ensure reliable accounting, promote efficient operations, and comply with laws and regulations.

Why Are Internal Controls Important for Nonprofits?

Nonprofits operate on budgets heavily reliant on donations and grants, where donors expect their contributions to be used wisely and as intended.

Strong internal controls not only prevent misuse of funds and financial mismanagement but also enhance the organization's credibility. 

This is crucial for attracting further donations and grants, providing confidence to the donor community that funds are being used appropriately.

Best Practices for Internal Controls

1. Clear Financial Policies

Nonprofits should establish and adhere to clear, written financial policies. These guidelines should detail procedures for accepting donations, approving expenses, and other financial activities, serving as a rulebook for consistency and accountability across the organization.

2. Segregation of Duties

Responsibilities for financial processes should be spread across several staff members to avoid concentrating too much power with any one individual.

For example, the tasks of writing and signing checks should be assigned to different people to minimize the risk of fraud and errors.

3. Regular Financial Reviews

It's vital to routinely examine financial statements and compare them with the budgets.

These reviews should involve not just the financial team but also the board members, ensuring thorough oversight and understanding of financial flows.

4. Secure Handling of Cash and Checks

Exercise utmost care when managing cash and checks. Use tamper-proof bags for cash deposits and make bank deposits promptly.

Immediately endorse checks upon receipt and store them securely until deposit.

5. Training and Education

Regular training on financial policies and the importance of internal controls should be provided to all staff and volunteers.

Understanding the reasons behind these measures and the risk of non-compliance promotes adherence.

6. Use of Financial Software

Employ reliable financial software to track and manage financial transactions efficiently.

This aids in maintaining accurate records and facilitates quick, efficient generation of financial reports.

7. External Audits

For added transparency and accountability, external audits by independent accountants should be conducted annually, especially for larger nonprofits.

These audits help pinpoint potential improvements in financial practices and ensure adherence to best practices.

8. Timely and Transparent Reporting

Commit to providing timely, accurate, reliable, and transparent reports on project status and financials to stakeholders.

This transparency not only reflects the organization's integrity but also reassures donors and partners about the effective use of their contributions.

9. Dealing with Fraud, Waste, and Abuse

Swift action should be taken against any instances of fraud, waste, or abuse of resources. Establishing a clear protocol for handling such issues ensures that they are dealt with promptly and transparently, preserving trust and accountability.

Conclusion

Effective internal controls are crucial for nonprofit organizations to manage their resources responsibly, maintain public trust, and fulfill their mission.

By implementing these best practices, nonprofits can safeguard against financial risks and ensure their contributions make the intended impact.

The writer is an independent Internal Audit Advisor, Enterprise Risk Management Consultant, and professional trainer.

He is the founder and Chief Operating Officer of Redric Consulting, your trusted partner for comprehensive training and consulting services in the fields of Governance, Risk, and Compliance (GRC). 

With a proven record of accomplishment in Internal Audit, Internal Control, Compliance, Fraud Risk Management, and Cybersecurity, Redric Consulting empowers your organization and ensures its success.

You may reach out to Frederick on [email protected]