Tips and Tricks for Improving Small Organization Internal Controls
By Nicholas Mandrus, CPA, Director, Assurance Services
Mid and large-sized nonprofit organizations often can employ a multi-layered accounting structure with several accounting professionals within a fully staffed accounting department, each with a clear role and distinct areas of responsibility. Such a structure easily allows for adequate separation of duties within the accounting department and multi-level reviews of journal entries, account reconciliations, and financial reports. However, for small nonprofit organizations with limited resources, an accounting department with multiple accounting professionals is often not a practical option. Fortunately, small organizations still have effective and efficient solutions to allow for adequate separation of duties and detailed reviews of financial information.
Below are several solutions which allow for small organizations with limited resources to maintain a robust internal control environment:
Utilization of an automated accounts payable system
Automated accounts payable systems can easily be configured to allow for multiple levels of reviews and approvals. For example, the accountant may enter an invoice and coding into the accounts payable system, followed by a required invoice approval and coding by the responsible program personnel and ultimate approval of the disbursement by the COO or CEO.
A daily cash report from the organization’s bank
Some banks allow an option for select management personnel to receive daily cash reports summarizing all transactions from the previous day. Small organizations should utilize this feature when available and have the notification sent to the accountant and key management personnel. This will ensure that all cash activity is regularly monitored and any unusual or unexpected activity is immediately identified and investigated.
Shared folders with critical financial documents
Using shared network folders can provide an easy mechanism to facilitate executive team members’ review of financial information. Such a shared folder should include key financial documents such as bank statements, investment statements, significant contribution agreements, and payroll reports. The records should be stored in an organized manner and shared with relevant executive-level personnel. Access should be limited and closely safeguarded to ensure confidentiality is maintained, and it is recommended that organizations work with their IT department or provider to protect such data.
Summarizing revenue agreements
A revenue agreement summary form should outline the key terms of each agreement and the rationale for the underlying accounting treatment. The specifications and thresholds for inclusion will differ for each organization based on the types and nature of funding sources. However, such a form will allow for the key terms and accounting treatment for all revenue agreements to be clearly documented, reviewed, and approved. It is recommended that the summary form and supporting agreements be stored in a folder shared with the accountant, development team, and key management personnel. This will also help during the audit process, as all key revenue agreements will be easily accessible for audit purposes, with accounting treatment clearly documented to answer any audit questions.
Review of general ledger detail
Regular review of the general ledger detail by someone other than the individual entering the transactions into the accounting system serves as an alternative for direct journal entry review, which isn’t always a realistic option when an accounting department consists of a single accounting professional. By reviewing the general ledger details, all transactions and coding can be checked for accuracy and legitimacy. The general ledger should be reviewed by an appropriate management-level individual in combination with the underlying support. The individual reviewing the general ledger detail should also have read-only access to the accounting system and basic working knowledge to allow for easy review and further investigation of any transactions or entries if needed. Ideally, the general ledger detail would be viewed weekly or monthly. The review and approval should be documented to leave a clear audit trail.
Monthly financial reporting package
A detailed monthly financial reporting package, which includes monthly financial reports and other key account reconciliations, is a critical component of a robust internal control system. Ideally, the report would consist of the monthly financial statements, the trial balance, key account reconciliations such as bank reconciliations, investment reconciliations, and accounts payable and accounts receivable reports. The CEO or equivalent should review the financial reporting package. Many small nonprofits also have the Board’s Treasurer or Audit Committee Chair examine and approve the financial packages to add an additional layer of review to the process.
The review of the monthly financial reporting package and all relevant reports should be clearly documented. One recommended method is for the monthly financial reporting package to be an Excel workbook with a separate tab for each report and reconciliation, with space on each tab for both the preparer and reviewer to initial and date. Another option would be sending the financial package via a system such as DocuSign, with the reviewer initialing and dating each page to indicate review and approval.
By implementing some or all of the above, small nonprofit organizations can combat the inherent limitations of a single-person accounting department efficiently and effectively. A sound control environment and accurate financial data and reporting are attainable for all organizations, regardless of size and resources.
