Separated-duties

Why Segregation of Duties at a Nonprofit Is Vital

Even with a small team and a limited budget, you can establish proper protocols to ensure financial transparency at your nonprofit organization.

If you’re part of a nonprofit that has tight limits on both staff and funding, you’ll end up wearing many hats and becoming a master multi-tasker. That’s a simple matter of necessity.

One area where you must be sure to share the load, however, is your organization’s financial infrastructure. Specifically, if you’re responsible for tracking and recording money and invoices coming into the organization, you must not be responsible for money going out of the organization (e.g., by paying bills or signing payroll checks).

Why This Matters

Dividing these financial responsibilities, also known as segregation of duties, is critical in any type of organization, including for-profit businesses. But it’s especially so at a nonprofit.

Fraud prevention, obviously, is the primary reason. Internal theft would not only deplete available funding, but could also irreparably damage the organization’s public image and scare away prospective donors. A recent Forbes article noted that while charitable giving has recently soared, “so has the sophistication with which individuals are giving.”

That means donors will have little tolerance for an organization that doesn’t have its financial house in order. Any hint of impropriety involving the organization’s books, or just the appearance of a conflict of interest among staff members, could be a devastating blow. Even an honest mistake could result in costly penalties from the IRS, including the loss of nonprofit status.

That’s why it’s so important for your nonprofit to create internal controls, such as segregation of duties, to put more than one set of eyes on every transaction.

How to Make it Work With a Small Staff

Segregating duties doesn’t have to be painstaking or complicated. You can do it with just two people — say, a bookkeeper and executive director. Here’s what the breakdown of duties might look like:

Bookkeeper Executive Director
Write disbursement checks. Receive bank statements (unopened), and review all transactions recorded in detail.
Reconcile bank statements. Sign and mail checks.
Record receipts and disbursements into accounting system. Make bank deposits.
Process payroll. Approve and submit payroll.
Process vendor bills. Review bank reconciliations.

Adding a third person would make your internal controls even tighter. Here’s what that might look like:

Bookkeeper Executive Director Board Treasurer
Process and record vendor bills for payment. Sign and mail checks. Receive bank statements (unopened), and review all transactions recorded in detail.
Reconcile bank statements. Review bank reconciliations.
Record receipts and disbursements into accounting system. Make bank deposits.
Process payroll. Approve and submit payroll.

Additional Controls

Other steps your organization can take to ensure squeaky-clean financials include thoroughly vetting all staff members and volunteers via detailed interviews, references and criminal background checks. You could also consider making sure all employees are bonded and using your bank’s lock-box services for all deposits.

The National Council of Nonprofits lists additional recommendations for internal controls, including simple steps such as requiring that any reimbursements for expenses must be approved in advance and in writing.

It’s also important to conduct an annual review of your internal controls to keep up with the latest trends, threats and new technology.

Finally, Try Outsourcing

But maybe the most crucial step you can take is to bring in a trained professional to set up the proper financial controls, including segregation of duties, for you. An outsourced bookkeeping service is a great place to start.

Why Segregation of Duties at a Nonprofit Is Vital

Craig Feltner

Craig Feltner, Managing Director of Supporting Strategies | Greater Cincinnati Ohio, helps business leaders reach their goals by providing high-level bookkeeping and controller services.

Legal and Tax Disclaimer

This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal, and accounting advisors, and you should consult with a tax, legal and accounting professional before engaging in any transaction.

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