Financial Controls

Q: I’m on the board of a very small all-volunteer watershed group.  We’ve begun to realize that nobody really ever knows what’s going on with the organization’s finances except the treasurer and sometimes the board president, depending on who is in the position at the time.  Although we trust the treasurer not to clear out the coffers and run off with the cash (frankly, he wouldn’t get very far), we think it’s time to set up some systems that would make sure the responsibility of tracking the organization’s finances doesn’t rest entirely on one person’s shoulders. Any suggestions on where we can start?

A: Systems are important in a nonprofit, just like they are in your household.  Establishing financial controls for your organization is as basic a necessity as organizing your kitchen cabinets so you can always find the cereal or coordinating a shared bank account with a family member.  But it’s difficult to know where to start—especially when your organization is small.  Here are five of the most important, most do-able financial controls for small groups:

1. The first thing to do is to set the control environment.  This is a fancy way of saying, you introduce and establish the procedures, make sure every single person on the board understands them and why they’re necessary, and get a pledge from everyone that they will observe and respect these procedures. In many organizations the top person might make exceptions for himself or herself about policies, which sets a sloppy or even unethical tone. Let’s say the board president isn’t providing receipts for their cash reimbursements—it lets other board members think they don’t have to follow procedures either, and they start cutting corners as well.  And having procedures that aren’t used is actually worse than having none at all. So, it’s important to set the control environment by emphasizing the importance of ethics and controls at board meetings, and demonstrating that everyone is following the rules, all the time.

2. Define clearly who is responsible for what. It's very easy—especially in a small organization—to assign tasks willy-nilly, based on who is available to do it at the moment. For instance let’s take the simple job of checking the mailbox.  In a small organization, sometimes the board president might get the mail—sometimes the treasurer might do it.  But then when an important check arrives in the mail and it gets thrown on the seat of someone’s car and ends up in the recycling, it’s a lot tougher to track that check down when the fault could lie with one of 3 or 4 people.  Similarly, with invoices: who is in charge of checking the math on the invoice, who is responsible for approving the invoice to be paid? If there is one person whose job it is to check the mail and one person who always checks over an invoice and pays it, you know the jobs will get done, plus it leaves less room for error.

3. Physical controls. Lock it up!  Computers should be locked to desks, and they should be protected with passwords. Put checks in a locked drawer. Among other abuses, there are too many cases where someone comes in and takes checks from the middle of the checkbook.

4. If there's cash involved -- such as at a fundraiser or box office at a performance -- have two people count all the cash together.   Also, have people who are collecting cash put all cash collected into a locked money box or bag at regular intervals, to be counted by two people later.

5. Reconciling the bank statement is obviously very important. As you say, it’s unlikely that your treasurer is going to clear out the organization’s bank account and run for the border, but just like it’s a good idea to have two people responsible so that the mistake one person makes can be caught by their partner.

Ideally someone other than the bookkeeper (or treasurer--whoever handles the money) reconciles the bank account from an unopened statement. That's a strong check on the person who handles the money. In the case of an unstaffed organization, the treasurer generally does everything related to finances and reports to the board. In these instances someone else, such as the vice president of the board, should receive the unopened bank statement, and look it over before giving it to the treasurer.

Other commonly recommended financial controls:

  • The person handling money not allowed to sign checks?Treasurers or bookkeepers should not sign checks. However, in a really tiny organization this may not be practical. One approach is to allow the bookkeeper (or the person who handles the money) to sign small emergency checks, for no more than $100 or $200. If everybody knows this rule, it helps to set a tone of accountability. And again, it will be caught by the person who does the bank reconciliation.

  • Two signatures on checks, or on large checks? This is okay as a policy, as long as you know that banks don't enforce this policy, nor can you hold them liable for a check that goes through with only one signature. Two signatures is a good policy so that someone sees the big checks, but it's more about setting the right tone than about preventing theft.  (A good threshold for how big a check would need to be to warrant two signatures: as much as your largest monthly or quarterly expense—like a rent check).

  • Never have a check issued to and signed by the same person! That one speaks for itself!

  • Keep use of petty cash to a minimum and keep a log of incoming and outgoing checks. It’s also a great idea to keep photocopies of checks received. If you’re receiving cash, keep in mind it’s illegal to photocopy cash, however, you can photocopy an envelope with the amount written on the front and the denominations peeking out the top.