Internal Controls for Not-For-Profits

The Institute of Management Accountants (IMA) Research Foundation studied the nature of internal controls in not-for-profit organizations and how those controls affect the incidence of fraud. This research can provide benefits to not-for-profit organizations by identifying best practices in internal controls in order to maintain management and Board integrity and safeguard resources.

Based on our experience and the IMA Research Foundation’s study, many smaller not-for-profits do not have the resources to allow for appropriate internal controls and segregation of duties.  As a result, they become victims of fraud, despite the mission of the organization.  The following common-sense, low-cost improvements to internal controls can be implemented by most organizations to mitigate and reduce the risk of fraud:

• Pay attention.  Perpetrators can get away with fraud because most people who should be involved never look.
• Recognize that your organization could be a victim.  Many charities believe their charitable mission protects them from crime. 
• Be transparent.  An organization that keeps its stakeholders informed of where their money is received and spent is one in which it is difficult to perpetrate fraud. 
• Stay involved.  Members and donors should insist that the nonprofit report how much money is coming in and where it goes, and members need to review reports and be prepared to ask questions.
• Spread the work.  Don’t make it easy for someone to take over all the duties that surround collecting money and spending.  Divide the duties among several members.

Organizations frequently resist efforts to improve their internal controls.  They may argue that fraud and abuse occur as a result of determined criminals and that their charitable mission provides unique protections.

However, contrary to such thinking, the IMA Research Foundation’s study indicates that this is not the case. There are significant differences between those organizations that experienced fraud and those that didn’t.  In particular, not-for-profits that experienced fraud significantly improved their internal controls after the fraud by increasing the frequency of beneficial financial practices.  After the improvements, these not-for-profits more closely resembled those organizations that didn’t experience any fraud.  

Our experience with not-for-profit organizations is consistent with the results of the IMA Research Foundation’s study.  We have seen many organizations that have ignored or resisted efforts to improve internal controls, including segregation of duties and transparency, become victims of fraud.

If you have any questions regarding potential fraud schemes or internal controls at your not-for-profit organization, please contact the Business Advisory Group at Schneider Downs.