Non-profit organizations (NPOs) face increasing scrutiny regarding their financial statements from various stakeholders, including board members, donors, state charity officials, and legislators. This heightened attention puts pressure on management, the board of directors, and auditors to ensure transparency and accuracy in financial reporting.
The Role of the Board in Financial Oversight
While management typically prepares financial statements, it is the board's responsibility to review and evaluate them. Often, this duty falls heavily on the treasurer, which can create an imbalance in board responsibilities. To address this, NPOs should consider establishing a financial reporting committee. This committee can work with external evaluators, including auditors, and develop policies to enhance the organization’s internal accounting system.
Importance of Internal Controls
Internal controls are essential financial management practices that help prevent misuse and misappropriation of assets. These controls are usually outlined in written policies detailing procedures and responsibilities. The goal is to create checks and balances on staff, board members, and vendors to reduce the risk of misappropriation of funds.
For small NPOs that often struggle with internal controls, it’s crucial to implement basic practices organized around financial management policies. These practices form the backbone of a robust internal control environment.
Key Financial Management Policies
A strong internal control environment relies on certain principles: public disclosure, governance, fundraising, and financial management.
Public Disclosure
NPOs must comply with federal and state laws and regulations. Key practices include:
- Maintaining a board-approved Document Retention Policy.
- Registering to solicit with the Attorney General where required.
- Providing written acknowledgment letters to donors as required by law.
- Making public documents, such as IRS Form 990 and the IRS Determination Letter, available upon request.
- Adhering to regulations on political campaign activities.
Governance
The Board of Directors must act in the organization's best interest, encompassing care, loyalty, and obedience. Key responsibilities include:
- Approving an annual budget.
- Developing, reviewing, and approving financial policies.
- Appointing a treasurer.
- Reviewing periodic financial reports and year-end financial reports.
- Overseeing the annual audit or review.
An essential policy for the board is a conflict-of-interest policy to address potential conflicts consistently and transparently.
Fundraising
NPOs should provide a donor privacy policy detailing the following:
- What donor information is collected.
- How donor information is used.
- How donors can edit their information.
Financial Management
Effective NPOs use funds efficiently to achieve their mission while investing in infrastructure. The Board of Directors should:
- Approve an operating budget early in the fiscal year.
- Review quarterly financial reports comparing actual to budgeted revenue and expenses.
- Maintain a board-approved policy on acceptable expenses and reimbursement procedures.
Financial Processing Procedures
Key areas of internal control for financial processing include receipts and deposits, disbursements, payroll, and financial reporting.
Receipts and Deposits
To avoid misuse of funds, responsibilities should be segregated. Duties include:
- Endorsing all incoming checks immediately and storing them securely.
- Recording incoming checks and cash in the Receipts Journal.
- Depositing checks and cash regularly.
- Maintaining records of all checks and deposits.
Disbursements
For disbursements, the goal is to ensure bills are approved before payment. The board should approve major purchases and maintain control through budget approvals. Vendors should be paid by invoices, not statements, to avoid double billing.
Payroll
Payroll is often the largest expense for NPOs. Proper documentation and withholding practices are essential. Timesheets, completed and signed by employees and supervisors, are critical for financial reporting.
Financial Reporting
All stakeholders must uphold the integrity of financial reporting. Employing competent CPAs and ensuring management designs and implements robust controls are vital steps. Oversight responsibilities include reviewing journal entries and understanding the organization’s status in bylaws, personnel policies, financial policies, and cybersecurity.
By implementing these practices, NPOs can strengthen their financial management, ensuring transparency and accountability to their stakeholders. Robust internal controls and proactive board oversight are key to navigating the challenges of financial scrutiny and achieving long-term sustainability
To read the full article from the Texas Society of CPAs: https://www.tx.cpa/resources/txcpa-magazine/issue-details/march-april-2024/2024/03/07/internal-controls-for-non-profit-organizations
