Accounting

Effective Internal Controls for Not-for-Profit Organizations (NPOs)

Written on behalf of Ford Keast LLP on June 23, 2023
An image of some staff working onsite at a local London not-for-profit organization (NPOs).

How to manage risks in your not-for-profit?

It’s no secret that not-for-profit organizations often run lean. They typically optimize resources with a restricted budget or with the help of volunteers or the community they serve. It can be more challenging for organizations to dedicate time and funds to preventative actions. Risk management-related items may take a back seat until issues that could have been prevented come to light. While risk management requires more work upfront, there is a massive payoff for lean organizations such as not-for-profits.

Risk management for not-for-profit organizations

Nonprofits often rely on external sources of funds to continue to work on specified causes and serve their community. Every day your organization can encounter several types of risks, such as liability risk, reputational risk, or risk of fraud. These risks can be a source of stress or anxiety for the management and board of the nonprofit if not appropriately managed.  Good internal controls can give your organization the right tools to manage and mitigate risks. They help protect the organization from fraud, waste and mismanagement of resources. An effective internal control system can help you achieve your organization’s objectives while minimizing risks.

Why are internal controls essential for your not-for-profit organizations?

Internal controls are essential for all organizations, regardless of size. Specifically for not-for-profits, internal controls increase transparency, making it easier for stakeholders to trust your organization’s operations and financial stability. An effective control system provides a process for different areas and workflows in your business. It can help:

  • establish processes and procedures around critical functions like collecting donations or making payments
  • improve operational efficiency around business workflows by removing redundancy
  • reduce human error with routine processes
  • keep all stakeholders accountable for their roles and responsibilities
  • identify areas of risk, such as those susceptible to fraud and error.

A sound internal control system can help protect your organization’s funds and streamline operations by preventing fraud, waste and mismanagement.

Internal control tips for nonprofits

Suppose your organization wants to set up or assess your internal control framework for your business but needs help knowing where to start. In that case, your accountant or CPA can be a valuable resource. They can help you determine suitable systems and processes for your organization. In the meantime, here is a list of controls that apply to most organizations. 

Segregate tasks and responsibilities.

One of the most critical internal controls for small businesses is segregating responsibilities. Assigning separate roles and responsibilities to different employees is a good way for companies to reduce risk. For example, the person who enters invoices should not be able to approve payments. By separating these responsibilities, you can help to prevent errors and fraud in your organization.

Establish clear lines of communication.

In a nonprofit organization, it is crucial to establish clear lines of communication. Your organization likely has many stakeholders, including donors, volunteers and the community you serve. A thoughtful framework around communication can help stakeholders report concerns about possible mismanagement or wrongdoing.

Implement access and physical controls.

Physical controls help to protect your organization’s assets and prevent fraud. If your nonprofit relies on volunteer staff, it is of utmost importance that there are specific procedures to onboard new volunteers and remove access once they are no longer working with the organization. Implementing procedures for background checks for volunteers and employees can also help mitigate risk.

Regular Budget Reviews and Reconciliations

A financial review of your organization can help you assess whether it is meeting its objectives and targets. Ensuring management and the board members can review the organization’s financials and banking records promptly can help protect your organization. If additional expertise is required, your accounting firm can provide training or support regularly to ensure that financial records are good. Regular reviews can help spot and prevent discrepancies before they become more significant.

Establish procedures for cash and bank accounts.

Ensuring that only the right people can access bank accounts and cash is vital. You can work with your bank to set up access as appropriate or limits where possible. Spot-checking cash balances daily or monthly or reviewing payments before sending them out are just a few examples of procedures to help your organization. Specifically, if your nonprofit has donor-restricted funds, it is recommended there be a process only to use them for their mandated purposes.

Document and Communiccate

Ensure your stakeholders know about the internal control procedures in place. Explain why these procedures exist and how they can help to safeguard the organization. Training on internal controls can also be a helpful way to ensure that your employees are up to date on the latest policies and procedures.

Internal Controls for Not-for-Profit Organizations

Not-for-profit organizations benefit from a strong and effective internal control system. Having policies and procedures helps all stakeholders and allows your organization to serve the community in a way aligned with the mandated mission.

Contact Ford Keast LLP in London, Ontario, for Accounting & Advisory Services for your Not-for-Profit (NPOs) & Charitable Organization

At Ford Keast LLP, we offer a team of skilled and exceptionally experienced Chartered Professional Accountants who provide comprehensive assurance services to various not-for-profit ventures. Trust us to take a disciplined, long-term approach to your finances to make your organization sustainable for years.

We are conveniently located in the heart of London and serve clients throughout Southwestern Ontario. To learn more about how Ford Keast LLP can help your organization, don’t hesitate to contact us online or call us at 519-679-9330.

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