Why Internal Controls Are Essential for Nonprofits – Even Small Ones

With 1.9 million tax-exempt organizations classified as public charities and a staggering $3.6 trillion in reported revenue (source: ProPublica), the nonprofit sector plays a vital role in our communities. But how can we ensure that these financial figures are accurate? Could that $3.6 trillion actually be $3.7 trillion?

At Meaden & Moore, we understand the critical role of internal controls in maintaining financial integrity, especially as required by auditing standards. However, many smaller nonprofits and purposefully limited organizations don’t require financial statement audits. Does that mean internal controls aren’t necessary? Absolutely not—in fact, they’re even more important for smaller nonprofits.

Why Internal Controls Matter for Nonprofits

Even small organizations run by volunteers can be vulnerable to financial mismanagement or fraud. Stories of trusted individuals misusing funds intended for youth sports, school bands, or community aid are all too common. Implementing internal controls helps nonprofits safeguard their assets, maintain public trust, and ensure that funds are used as intended.

Here are three practical steps nonprofits can take to strengthen internal controls, regardless of their size.

1. Create a Paper Trail

A clear record of financial transactions reduces the risk of errors or misuse. Steps to establish a solid paper trail include:

• Pay all expenses with checks. Avoid cash payments whenever possible.
• Provide official receipts for cash donations. Ensure all donors receive a signed acknowledgment.
• Maintain detailed deposit records. Track dates, amounts, and sources of incoming funds.
• Reconcile bank statements monthly. Regular reviews help catch discrepancies early.

2. Design Processes Involving Multiple People

Segregating financial duties ensures that no single person has unchecked control over the organization’s funds. Consider these best practices:

• The treasurer writes checks, and the president signs them.
• Paper receipts are numbered and tracked by the treasurer and reviewed by the vice president.
• The treasurer prepares deposits, while the secretary delivers them to the bank.
• The treasurer reconciles bank statements, and the president reviews the reconciliations.

3. Review Financial Reports Regularly

Transparency and accountability are key to maintaining trust within the organization and with donors. Regularly review financial performance by:

• Holding routine meetings to analyze financial information.
• Comparing actual results against the budget and prior year’s performance.
• Asking questions and requiring clear, documented answers.
• Ensuring internal financial records align with the annual IRS Form 990 filing.

Cultivate a Culture of Oversight

Awareness is a cornerstone of strong internal controls. Volunteers and board members should understand the importance of oversight in the financial process. If individuals resist or object to implementing checks and balances, consider it a potential red flag.

Take Action to Strengthen Internal Controls

Start the conversation within your nonprofit about safeguarding financial resources. Evaluate your current processes and identify areas for improvement. For deeper insights, consider an internal control review by Meaden & Moore. Our experts can help identify weaknesses, address deficiencies, and implement robust controls tailored to your organization.

Protecting your nonprofit’s finances not only ensures compliance but also builds trust with your donors and community—allowing you to focus on making a meaningful impact. For tailored advice and expert assistance in implementing effective internal controls for your nonprofit, contact the team at Meaden & Moore today—we’re here to help safeguard your organization’s mission and financial health.