All About Internal Controls – Contributions

Post by Paul Smith

An effective internal control system over contributions is the foundation on which healthy organizations are built. Since contributions are the major source of revenue for a not-for-profit organizations, there is always a heightened risk associated with this area. The internal control system that management develops in order to mitigate this risk will depend on a variety of factors. However, there is a core group of concepts that must be addressed in any effective set of internal controls over contributions.

Setting the proper “tone at the top” of management is an essential part of any effective internal control environment. If individuals in a leadership position consistently implement the controls that are in place, it will help foster a culture in which every member of the staff is encouraged to properly implement these controls as well. This requires good communication within the organization as well as continued monitoring of the controls in place in order to determine how well they are operating.

Segregation of duties is also integral in establishing effective internal controls over contributions. Ideally, there will be a separation of duties among those who receive the cash, post entries to the organization’s records, reconcile receipts to bank statements, and prepare financial statements. Also, as many entities move toward a paperless receipt system, adequate controls over contributions will increasingly overlap with adequate controls over IT systems. This will include limiting access to certain functions to the appropriate individuals. Also, controls should be implemented that will prohibit management override of network systems. As most networks will require frequent upgrades, this will also allow management to monitor the controls over this area to ensure proper implementation.

Delinquent contributions should be investigated on a timely basis and collectability should be evaluated to ensure the contribution balance is fairly stated.

In addition to establishing properly operating controls, it is important that a supervisor review each step and a review trail is documented. An example of this would be management signing off on contribution reconciliations to indicate its review.

An effective control environment is essential to the success of any organization. Human error is inevitable and fraud risk is always present on some level. In order to guard against these risks management should accept the responsibility of establishing an effective internal control environment.

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