It is now more important than ever for your organization to have strong internal controls. Reviewing and updating your internal controls is essential to ensure they are working effectively.
What Are Internal Controls and Why Are They Important?
Internal controls are processes implemented and followed by an organization to provide reasonable assurance in achieving:
- Efficient and Effective Operations
- Safeguarding of Assets
- Fraud Detection and Prevention
- Reliable Financial Reporting
- Compliance with Laws and Regulations
- Preservation of Reputation
5 Common Gaps in Internal Controls
Bank Reconciliations
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Internal Control: Performing monthly bank reconciliations timely, with review and approval by an individual other than the one performing the reconciliation.
Common Gap: Bank reconciliations are not completed and approved by a set date after month-end (e.g., the 5th business day), and approved by a designated supervisor.
Review and Approvals
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Internal Control: Supervisory review and approval of organizational spending.
Common Gap: Expenses are approved without supporting documentation that clearly shows the amount of the expense and a valid business purpose.
Separation of Duties
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Internal Control: No one person should have complete control over all aspects of a financial transaction.
Common Gap: New vendors are set up in the accounting system by the same staff member who processes and pays vendor invoices.
Check Signing
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Internal Control: Requiring two authorized signatures for checks issued and electronic payments in excess of a designated threshold.
Common Gap: No formal policy is established and adhered to designating the threshold above which two signatures are required on checks and electronic payments.
Physical Safeguarding of Assets
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Internal Control: Keeping physical assets in a secure location with access given only to authorized personnel.
Common Gap: Cash and confidential documents are not kept in a locked cabinet or secure online location with access given to staff only if required for their job.
Protect Your Nonprofit!
Gaps in internal controls are often only identified during an independent assessment of your nonprofit’s finance department operating procedures. For more information about how you can address and improve your organization’s operating procedures and internal controls, please schedule a complimentary consultation.
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