Internal Controls: Segregation of Duties in Small Nonprofits

Mary Kreider

Nonprofit organizations have a responsibility to be good stewards of the resources they’re given. The commitment of the Board of Directors and leadership to ethical behavior sets the tone for the entire organization. Emphasizing the importance of integrity from the top down creates an environment where internal controls will be most effective. The reality is that nonprofit organizations are continually asked to do more with fewer resources. Often the organizations are driven by volunteers looking to improve their communities, serve a need, and do some good in the world. Many times, nonprofit organizations are understaffed, and the concept of segregation of duties seems daunting, if not impossible. It’s imperative for nonprofits of all sizes to protect themselves and ensure they can continue their good works well into the future.

Let’s look at ways a small nonprofit organization can do that.

What is segregation of duties?

What, exactly, does segregation of duties mean? It’s one of those accounting jargon terms that non-accountants might not fully understand. To put it simply, it is the system of checks and balances an organization puts in place to separate who is responsible for recording, authorizing or approving, and who has access to the related asset. Ideally, multiple people would be involved so that one person is not responsible for multiple functions.

Take, for example, a volunteer parent who is treasurer of the parent-teacher organization. That parent sits at the bake sale table, accepting cash from paying customers. The parent also deposits the money into the bank account, reconciles the bank statement, and records all the transactions in a spreadsheet to provide as the treasurer’s report. This parent and the organization have both left themselves open to the possibility of error or inappropriate or fraudulent actions. For both the individual and the organization to protect themselves, it is important to separate the steps in the organization’srevenue process.

How can a small nonprofit segregate key duties?

The difficulty for many nonprofits and other small organizations is the lack of people who can be used to spread the various steps of the process. Management must consider all the possible people involved with the organization who could help perform the functions, assigning duties to volunteers and members of the Board of Directors to augment the various duties. Also consider outsourcing some functions to an independent third party, like a CPA.

See recommendations for How to Segregate Duties in Smaller Organizations in a two-person, three-person and four-person office.

Hiring additional staff or finding suitable volunteers may be difficult, if not impossible. It is important for management to consider the processes and procedures that are particular to their organization and assess where they are at risk. If separating duties is not practical or cost effective, or if the risk is low, then alternate options should be considered. Management must balance their approach to include different types of controls. The goal is to reduce the risk of error or fraud.

Watch the budget, and implement expense policies and procedures

Using a budget can be an important step for nonprofit organizations. The overall objectives of the budget should be set by the Board or management at the beginning of the process. Then the organization should set a revenue budget and receive input from program directors to set the expense budgets. The proposed expense budgets and the revenue budget should be analyzed together and brought into the desired relationship, based on the overall objectives set by the Board and/or management. Management should provide consistent, meaningful review and monitor the progress throughout the year through variance reports and determine corrective action, if necessary.

By using a budget, the organization can give the authority to approve expenses that are within budget to the program directors while requiring specific authorization for checks written over a certain dollar amount, or for certain types of transactions, like a wire transfer of any amount. No one should be permitted to sign a check payable to themselves. Expense reimbursements to management should be approved by a Board member.

Use software to restrict access

The features of the accounting software should be used to help separate duties by restricting access to certain areas of the software and donor database. Management should also restrict physical access to assets. For example, a church may collect an offering during a service that is immediately put into a locked safe until it can be counted by two or more people, and then put into a sealed deposit bag and taken to the bank.

Numerous solutions are available to protect nonprofit organizations when the Board of Directors and management insist on high standards of ethics and integrity. The trick is finding the combination of controls that are right for each organization, including segregation of duties, ensuring that the individuals and the organization are both protected. That’s where Yeo & Yeo can help. Our professionals can assess the internal controls in place and provide suggestions for improvement tailored to your organization.

Mary Kreider

Mary Kreider

CPA

Mary Kreider, CPA, provides business consulting, financial reporting and tax planning and preparation services with a focus on nonprofit organizations. She is a member of the firm’s Nonprofit Services Group and has 12 years of public accounting experience. She is a senior manager in the Saginaw office. Contact Mary at markre@yeoandyeo.com or 989.793.9830.