We continue our series looking at developing a strong financial leadership model. This month and through the next couple of months, we will focus on operations. We will talk about effective organizational policies for internal controls, how your accounting software can improve operation efficiency and reporting, and how to calculate the true costs of programs and organizational administrative costs.
This month we will look specifically at internal controls. Do you think of your auditor when you hear the words internal controls? I know I do. I can promise you, your auditors aren’t there looking for solid internal controls to make your life miserable, they really are taking an outside perspective to ensure your organizations assets are safe.
What are internal controls and why does your organization need them? Internal controls are defined as policies and procedures that stand in place to prevent the mis-use of funds for unauthorized purposes. Why is it important to have them? Internal controls should be in place to ensure all data is accurately recorded, prevent fraud and loss by safeguarding the organizations assets, encourage operational efficiency by reducing the duplication of work, and assure adherence to management policies and funding requirements.
There are two things your organization needs in terms of internal controls:
- Solid policies and procedures document that is signed by all employees, and
- Internal control checklist that specific individuals adhere to during each process.
The internal control policies and procedures manual would include accounting policy type areas, both for accounting and non-accounting staff. Examples of policies and procedures include: how often to turn in credit card receipts; how often to fill out time sheets and which staff approves them; how to submit for an expense reimbursement; and certain other areas of reporting.
Aside from the policy and procedure manual, an internal control checklist should be created. This should include all aspects of transactional processes for things liked cash receipting, cash disbursements, and payroll. It should include in detail how the individual assigned to the task is to properly handle those transactions in a manner that is ensuring the safeguarding of the organizations assets.
Most importantly, internal control policies and checklists should address separation of duties. It is very important to set up separation of duties as much as possible. This can be especially tricky for smaller organizations that may only have a couple of employees. You may only have an office manager and an Executive Director. The easiest solution in this situation is to have the office manager open the mail, record the checks, take the money to the bank, and complete the bank reconciliation at month end. That scenario would result in a deficiency in your internal controls. There is no one checking to see if the totals match. If this is the case for your organization, we would encourage you to use an outsourced accounting firm as a monthly check or even your board treasurer, someone that can review and sign off on things each month. Again, It’s important to make sure that one single person is not responsible for 100% of the processes without anyone checking the work.
Check back next month, as we continue our series on A Guide to Financial Leadership!