Internal Control
One of the primary responsibilities of directors of non-profit organizations is to ensure that your
organization is accountable for all its finances to Donors, government officials and other
stakeholders.
Internal controls are policies and frameworks set up within your organization to
- Protect sound management practices and manage internal risk.
- Report finances accurately and reliably for making decisions
- Ensure compliance with laws and regulations and organisation policies.
- Assets and records are safeguarded and not misused or misappropriated
Internal controls are not just limited to accounting and reporting, and also cover all other functions
within the organization,
Framework for Internal Control
The first step in developing an effective internal accounting control system is to identify those areas where fraud or misuse can occur and implementing effective controls to prevent misuse or
misappropriation
Effective internal controls can be implemented as:
Effective internal controls include implementing procedures for
a. Monitoring Assets
- Preparation of Annual budgets and periodic reports with variance analysis
- Ensuring Cash receipts, payments and petty cash controls are received, authorised,
paid, recorded and reconciled and kept securely - Disbursements are done by proper authorisation, valid and organisational purposes
and recorded appropriately - Payroll Disbursements are done under proper authorisation to bonafide employees,
recorded properly and compliant with legal and statutory requirements (all tax
deductions and payments) - Fixed Assets ae acquired with proper authorisation, recorded and protected.
- Accessing, inputting, changing and preserving electronic data must be with
authorised personnel
b. Segregation of Duties
Involves separating three main functions and having them conducted by different
employees
- Authorisation (e.g. two individuals ae required to authorise a cheque)
- Documentation (One person creates a document and another approves it)
- Custody of Assets (One person disburses cash and another person is in custody and reconciles it)
c. Personnel Polices
For setting of wage structures, leave management, benefits, performance management
need to be structured to ensure appropriate application across all employees
d. Disclosure of conflict of interest and related party transactions by all the key personnel
needs to be implemented which requires
- the individual to disclose any interest or transaction which he/she or his/ her family members have in the organisation or with any organisation which it does business
- that such individual may not participate in any decision to approve doing business with the individual or any entity in which the individual has an interest.
- the organization to have a code of ethics addressing issues such as transparency anddisclosure in fundraising solicitations
e. Internal Audit Procedures
Review of the internal control procedures periodically to ensure that they are effective and
working well
- Evaluate periodically to ensure that they are relevant and make necessary changes with authorisation to update them
- Identify any conflict of interest or related party transactions
- Ensure compliance with statutory and regulatory requirements
f. Independent/ statutory auditors
Appoint and engage an independent auditor to annually audit the accounts and financial statements and report to the Directors/ trustees and the relevant regulatory authorities
g. Governance Procedures
Periodic review of an organization’s structure, procedures will assist directors/ board members/ Trustees etc. in determining the relevance of the current practices and what the organization might want to change
Internal Control Best Practices
Some examples of internal controls are
- Every payment made has a supporting document providing evidence
- All cash or cheques received are recorded on pre-numbered carbon copy receipts or
generated with numbers from an accounting system. - All payments and receipts are recorded in cashbooks. Cash receipts should be recorded
immediately and deposited daily. - All cashbooks are updated regularly. Reconciliation of cash book with physical cash done on
a weekly basis under a supervisor - Cheques are signed by two authorized signatories as decided by the Board and registered
with the operating bank. - bank reconciliation is done each month, for every bank account. Bank accounts should be
reconciled monthly by someone other than the person who signs the checks - Checks to vendors should be issued only in payment of approved invoices, and the
supporting documents should then be cancelled, - The person who is responsible for the physical custody of an asset should not also have
responsibility for keeping the records related to that asset - The person who has authority for placing employees on the payroll and establishing wage
rates should not be the same person who signs the checks
Useful Resources:
https://www.councilofnonprofits.org/tools-resources/internal-controls-nonprofits
http://www.ncdsv.org/images/CPNS_Internal-controlscchecklist_2008.pdf