How Internal Controls Can Protect a Nonprofit’s Future

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Internal controls are a familiar emphasis for professionals working in the world of publicly traded companies. Regulations from laws like the Sarbanes-Oxley Act (SOX) require public companies to adopt strict procedures for how financial assets are handled. Every step in an organization’s financial procedures, from contract execution to check writing, can be captured by internal controls rules. These requirements spill over into business’s auditing processes and can have significant impacts on how a company’s financial results are interpreted.

Of course, nonprofits are not subject to the same type of regulatory scrutiny that publicly traded companies are. Developing a comprehensive internal controls process typically requires professional advice and numerous changes to the way an organization operates. In other words, SOX-compliant internal controls can be expensive and time-consuming. Fortunately, a nonprofit can still take advantage of the benefits of internal controls without going all the way.

Internal controls can have as broad or as narrow a reach as a nonprofit’s leaders feel will adequately address risks and improve governance. The types of controls a nonprofit needs will depend on its size, financial resources, number of employees, and other factors. Ultimately, internal controls have several goals:

  • Ensure transactions have been properly approved by the right people.
  • Limiting the authority of individuals.
  • Enforce consistent treatment of revenue.
  • Protect the organization from fraud and errors.

Here are some examples of internal controls that even small nonprofits might consider adopting:

  • Procedures for reviewing contractor invoices, reimbursements, and other disbursements.
  • Specific limits on the financial commitment each employee is permitted to make without management approval.
  • Procedures for reviewing and approving contracts before they are executed.
  • Routine review of bank statements, payroll, and other critical financial reports by someone other than the individual or individuals who are primarily responsible for accounting functions.

Each of these categories can be unpacked into significantly more detailed rules. The Church Law Center of California works with nonprofits to develop plans that protect them from financial and legal risk. We can help your organization develop internal controls that give it tools for building long-term, sustainable success . Call us today at (949) 689-0437 or reach out to us through our contact page.

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