One aspect of internal controls that many organizations (particularly those that are small) find challenging is dividing duties.
Separation of duties simply means having more than one person complete each financial transaction for the organization.
Basically, this means that you want to make sure that there is more than one person handling various aspects of financial documents including both revenues and expenses. Understandably, this can become a challenge for small organizations. According to the Association of Fraud Examiners, most fraud in organizations occurs in organizations that are small (fewer than 100 employees) and by an employee. Duties need to be segregated so that no one has the ability to cover up an intentional or unintentional accounting mistake.
This may mean that one person receives payments, donations, etc., while another records them in the accounting system you are using. All cash received should be accompanied by a written receipt documenting the amount received. Checks should be made payable to the organization and not to any individual. If an organization receives contributions on-line, you will want to ensure that they are going directly into the organization’s account. And, all deposits are verified.
On the other side, segregation of duties also comes into play with expenses. All expenses need to be approved by an individual other than the person who is actually paying the bill. A simple way to do this is to have the person initial that the invoice has been approved for payment. And, it should be an organizational policy that bills are only paid from invoices. Doing so will help to ensure that a bill is not paid twice or mistakenly forgotten. And note—-quotes or estimates are not invoices.
Then, all expenses should be entered into the organization’s accounting system, ideally by someone other than the person who is signing the checks.
It is understandable that this may be challenging for organizations that have a small or non-existent staff. Ultimately, this may mean that the organization has a board member review and periodically “test” transactions. In the accounting world, to “test” means to verify all documentation association with a transaction. Transparency and accountability must exist as you seek to gain grant support and or build your donor base. When you have an audit or financial review, you will also be asked about your processes in terms of segregation of duties.
I have been asked by some organizations why it is necessary to have segregation of duties when they are a Christian ministry. Segregation of duties is necessary to show stakeholders that you have systems in place to ensure that funds are used appropriately —that the likelihood of misappropriation of funds is limited. I will also tell you that when humans are involved, there is always a possibility for error and for temptation to occur.
As your organization seeks to increase its donor base (both in number of donors and size of donation), it is important that it has a system of checks and balances in place – separation of duties is simply that – a system of checks and balances.
This post was contributed by Debbie DiVirgilio, owner and principal consultant of The Faith-Based Nonprofit Resource Center. Debbie has more than 20 years of experience serving in the nonprofit sector. Since starting the consulting firm ten years ago (formerly known as DiVirgilio & Associates), she has acquired more than $40 million in funds to support the needs of individuals and communities.