Nonprofit organizations face the risk of error or fraud in the reporting of transactions, maybe even more so than for-profit businesses do. Therefore, internal controls are vital to an organization’s success. Let’s take a brief look at the two main types of internal controls: preventive and detective. These areas must be considered when assessing the overall effectiveness of your organization’s system of internal control.
Preventive internal controls are designed to stop, discourage, or make it more difficult for an organization’s employees to commit fraud. For example, it is important to have different employees in charge of each step in the receiving/recording process. This is known as segregation of duties. It is also essential to require specific signatures to approve spending, also known as authorization. However, to maximize the effectiveness of segregation of duties and appropriate authorizations, it is vital to keep accurate documentation. Maintaining accurate documentation will not only make it easier to track each dollar that is coming in and going out, but it will also make the annual external audit go a lot smoother as well!
Detective internal controls are designed to assist in identifying any possible errors or fraud that has occurred within an organization, which then makes for easier corrective actions. These controls also provide evidence for whether the current preventive controls are working effectively. An easy, yet effective, detective control is a bank reconciliation. Reconciliations should be done timely and monthly to ensure that all transactions are being appropriately accounted for. Other detective controls include employee reviews, internal audits, physical inventory count, and analyses of accounts. When detective internal controls identify an error, it’s necessary to take corrective action. Responsible personnel must investigate and act on matters that are identified. It is also necessary to periodically review control activities to determine their continued relevance.
Interested in learning how Yeo & Yeo can assist in executing an internal control assessment? Learn what the assessments are, what they involve, what they deliver, and how they can help your organization by reading our eBook: An Internal Controls Study – Your Key to Maximizing Efficiency and Safeguarding Against Fraud and Waste.