Nonprofit organizations rely on trust – public trust in charitable institutions, social trust in the concept of philanthropy, and interpersonal trust among donors, board members, and employees. But without strong internal controls, trust can also become a tempting opportunity for fraud.
How can your nonprofit organization protect itself from fraud? Ask yourself a few simple questions to begin assessing – and addressing – your risk.
Are financial duties segregated?
Your organization’s financial activities should always be split between at least two different people. For example, the person who deposits checks at the bank should never be responsible for reconciling those same bank accounts.
How do expenses get approved, and by whom?
You should have a clear system for approving payments, with a limited number of authorized approvers. All expenses should include supporting documentation, such as an invoice or receipt.
What do your accounting records look like?
Messy books are easier to manipulate. Bookkeeping entries should always be recorded as soon as possible and reconciled with your bank and credit card accounts on a monthly basis.
Do you have a written internal controls policy?
It’s tough to follow the rules if the rules aren’t written down. Every organization, no matter how small, should have an internal controls policy that explains how financial procedures are performed.
Do you cross-train and rotate responsibilities?
It’s a good idea to occasionally get fresh eyes on your financial activities – an employee who refuses assistance might have something to hide. Cross-training also helps to keep critical functions operating smoothly during staff transitions or other disruptions.
When was your last audit?
A nonprofit audit is an independent examination of your organization’s financial records, which includes stringent tests of your internal controls. Auditors can help assess your risk and make suggestions for improvements.
The risk of fraud never goes away entirely. But with a few common-sense policies, you and your nonprofit stakeholders can all sleep more soundly at night.
