Many organizations operating in Oregon experience asset losses related to thefts, embezzlements, or other diversions of assets and these trends are mirrored in charities throughout the country. The Department has found that most situations leading to charitable asset diversion are directly related to an
organization’s maintenance of reasonable financial records and implementation of meaningful financial controls. Oregon law requires that nonprofit corporations maintain appropriate financial records, see: ORS 65.771(2). Most financial losses could be easily avoided or quickly identified if organizations implemented basic financial controls, such as regular independent review of bank statements or following a proper expenditure review process.
Financial controls are often referred to as internal controls. The following is a list of minimum internal controls that should be in place in any non-profit organization, regardless of size. Additional internal controls should be considered and adapted to the circumstances and operations of the nonprofit. Effective internal controls limit any single individual from having control over two or more phases of a financial transaction or operation. For example, an individual that receives cash and issues a receipt for it (access to assets) should not also record the cash deposit in the receipts journal (accounting duties). An individual
that makes accounting entries (accounting duties) should not be the same person that has check signing authority (management duties). The bank statement and cancelled checks should be received and reviewed by someone that is independent of all the steps in the above process (independent oversight). In this manner, no single individual has too much control and there is oversight for each step in the process. A similar system can be used for the expense cycle as well. Even if an organization has
no staff, it can still ensure that there is adequate separation by assigning duties to board directors or volunteers. The organization’s bank statements should be reconciled on a monthly basis by someone who does not issue or sign checks on behalf of the organization. In addition, copies of checks, wire transfer information, and other information relating to deposits and withdrawals should be maintained along with the
monthly statement. Checks and other expenditures should be examined to verify that the payments are consistent with the organization’s activities and that the expenditures were appropriate. Similarly, deposit activity should also be reviewed to ensure that it corresponds to expected revenues. For example, if the organization held a fundraising event that generated cash, the reviewer should look to see that there are cash deposits that correspond to the event. If the organization banks online, it
should still be sure it is regularly downloading or printing and storing its bank statements, deposit slips, check images, and similar documents. Banks routinely charge fees to access older records. Adopt cash handling proceduresIdeally a cash register or multiple-copy receipt book should be used in the collection of cash. With respect to fundraising events or other situations in which the organization receives cash, it should arrange for two people to accept, record, and monitor the collection and a third person to arrange for its deposit. Cash transactions should be recorded into a journal or log to enable account reconciliation. It is important that any cash revenues be deposited to the organization’s bank account as soon as possible, and that management verifies that the amount deposited matches the amount collected. Document income from sources other than cashRevenue from sources other than cash (i.e. credit cards, checks, etc.), should also be entered into a journal or log, at the very minimum. Checks should be restrictively endorsed (for example: “for deposit only, ABC organization, First National Bank, account # 123456789) immediately upon receipt. Checks and deposit slips should be copied before they are deposited. Organizations that receive noncash donations should also adopt controls similar to that for cash donations to ensure that such donations are properly received, recorded, and accounted for. Control the use of credit and debit cardsCredit and debit cards are convenient, but each authorized user increases the possibility that the cards will be used for improper purchases. If the organization uses credit or debit cards, it should limit the number of users and set policies regarding their use. Credit card statements, bank statements, and supporting documentation should be reviewed monthly by someone who is not on the list of authorized card users. The reviewer should confirm that each charge is supported by a receipt and documentation of the business purpose of the expense. Some financial institutions allow organizations to set and adjust strict limits on usage of electronic payment methods and to send automated notifications to reviewers in the event of any attempted or actual misuse. Such services are particularly valuable to smaller organizations who rely on volunteers or smaller professional staffs.
Cash expenditures should be avoided to the extent possible. Consistent with the proper segregation of duties, a single person should not be responsible for the collection, deposit, and reconciliation of cash receipts or other sources of income. If it is necessary to make payments in cash, those payments should be fully documented through advance approval, signed receipts by persons receiving cash, and expense vouchers or other documentation that the cash was used appropriately.
Additional Resources on Financial Management and Internal ControlsNonprofit Association of Oregon » CompassPoint Nonprofit Services » Greater Washington Society of CPAs Educational Foundation » Nonprofit Risk Management Center » BoardSource » National Council of Nonprofits » Evangelical Counsel for Financial Accountability » Which of the following would most effectively assure that recorded Purchase transactions are free of material errors?Which of the following controls is most effective in providing assurance that recorded purchases are free of material errors? Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers.
What evidence is appropriate to determine whether recorded Purchase transactions are valid and the vendors charged the correct prices?What evidence is appropriate to determine whether recorded purchase transactions are valid and the vendors charged the correct prices? Receiving reports and purchase orders.
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