What Are Some Practical Steps a Nonprofit Can Take to Improve Their Internal Control?

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Strong internal controls aren't a luxury reserved for large organizations—they're essential safeguards that protect your nonprofit's mission and reputation. Whether you're operating with a staff of two or twenty, the right controls prevent fraud, ensure accurate reporting, and demonstrate to donors that their contributions are being stewarded responsibly. 

You don't need a big budget or complex systems to build effective controls, just a strategic approach that fits your organization's reality. Here are practical, high-impact steps you can implement right away. 

Why Internal Controls Matter for All Nonprofits Even for Small Nonprofits 

Internal controls are policies and procedures that safeguard assets, ensure accurate financial reporting, and prevent fraud or errors. Strong controls demonstrate accountability to donors, funders, and regulatory bodies while protecting your mission-critical resources. 

Establish Segregation of Duties 

The most critical control separates incompatible financial duties among different individuals. Ideally, different people should handle authorization, custody of assets, and record keeping. 

Create Compensating Controls  

If one person processes donations and deposits, have a board member reconcile bank statements. Never allow the executive director sole access to all financial transactions. Rotate duties periodically and require mandatory time off for financial staff to create natural checkpoints. 

Implement Dual Authorization 

Require two signatures for significant transactions including:

• Checks above a predetermined amount for each organization

• Wire transfers

• Large credit card charges

• Vendor payment changes

Many banks offer dual authorization for online banking. This simple step protects assets and personnel from suspicion. 

Conduct Monthly Bank Reconciliations 

Assign someone independent of cash handling to reconcile bank statements monthly. A second person—ideally the board treasurer—should review the reconciliation. This catches errors quickly and verifies that recorded transactions match actual bank activity. 

Create Formal Approval Processes 

Develop written policies specifying who authorizes different expenditure types and amounts. No one should approve their own expenses. Require original receipts, detailed expense reports showing business purpose, and appropriate authorization levels. 

Secure Financial Documents 

Store blank checks, credit cards, and signature stamps in locked locations with limited access. Use pre-numbered checks to identify missing items. Write "VOID" across cancelled checks and retain them rather than destroying. Protect online banking credentials with strong passwords and limit access. 

Document Policies and Procedures 

Create written procedures for:

• Cash Handling

• Purchasing

• Expense Reimbursement

• Payroll

• Financial Reporting

Include capitalization policies, gift acceptance guidelines, and conflict of interest requirements. Written policies ensure consistency, facilitate training, and demonstrate governance commitment to stakeholders. 

Strengthen Board Oversight 

Establish a finance committee to:

• Review monthly financial statements

• Question unusual items

• Monitor budget compliance

The full board should receive financial reports at every meeting. Active board engagement with financial information strengthens organizational accountability. 

Perform Surprise Cash Counts 

For organizations handling cash receipts, conduct unannounced cash counts with two people present. Document results, compare to recorded amounts, and investigate discrepancies immediately. This practice deters theft and ensures consistent cash handling. 

Restrict System Access 

Implement user-level permissions in financial software based on job responsibilities:

• Create separate user accounts

• Require strong passwords

• Maintain audit trails

Review access quarterly and remove permissions promptly when staff members leave. 

Schedule Regular Reviews 

Conduct quarterly or semi-annual internal reviews of key controls. Assign board members or objective volunteers to test policy compliance and examine transaction samples. Address findings immediately rather than waiting for annual audits. 

Seek Professional Guidance 

Partner with experienced advisors who understand nonprofit challenges. Professional assistance is especially valuable during transitions, software implementations, or organizational growth periods. 

Questions  

Have questions or ready to strengthen your nonprofit's financial controls? DeLeon & Stang provides tailored advisory services for nonprofits of all sizes throughout the U.S. Contact Us to learn more.