Separation of Duties for Effective Internal Financial Controls

Preventing losses and improving the reliability and quality of fiscal reporting are the goals of every nonprofit manager. The Internal Revenue Service (IRS) is just as interested in having nonprofit leaders implement procedures to decrease fraud and losses while improving efficiencies at the same time.

    To that end, Sheila Shanker, CPA, explains in Nonprofit Finance: A Practical Guide that the federal Form 990 tax return offers clues about some governance controls expected, such as:

  • Does the organization have a written conflict of interest policy?
  • Are officers, directors or trustees and key employees required to disclose interests that could give rise to conflicts?
  • Does the nonprofit’s leadership regularly and consistently monitor and enforce compliance with policy?
  • Does the organization have a written whistleblower policy?
  • Does the organization have a written document-retention and destruction policy?
    Unfortunately, some nonprofit managers consider controls only after serious problems occur, such as large losses due to errors or fraud. The mind-set needs to change, and leaders must be proactive about implementing proper internal control procedures to avoid problems. These might include the segregation of duties, which involves the separation of certain activities to decrease errors and theft. In general, this involves

  • The separation of custody of assets;
  • The authorization or approval of related transactions affecting those assets; and,
  • The recording or reporting of related transactions.

A traditional feature of segregation of duties is for the person who pays the bills not to sign the payment checks.
In smaller organizations, segregation of duties may not be possible, but other controls can be implemented to minimize risks. For example, the treasurer or a board member can examine bank transactions once a week. Someone from the board also may review bank reconciliations and lists of new vendors generated by the accounting system. This allows identifying an odd vendor or amount, thus minimizing the risk of payments to fake vendors.