Nonprofit Fraud Prevention

The bank might not require a dual signature for checks, meaning two people need to sign any one check or any check over a certain value, say $100. However, a nonprofit should incorporate this into its bylaws as standard practice to provide protection against unauthorized transactions.

Ask each board and staff member to agree in writing to uphold the policy. A conflict-of-interest policy should be reviewed regularly. A small division of the IRS is charged with ensuring that nonprofits are complying with the requirements for eligibility for tax-exempt status. IRS auditors investigate the financial affairs of thousands of nonprofits each year. As a result, a handful of organizations have their tax-exempt status revoked; others pay fines and taxes. In 1996, legislation authorized the IRS to penalize individuals who abuse positions of influence within public charities and social welfare organizations. Formerly the only weapon available to the IRS was to revoke tax-exemption, which resulted in the denial of service to the clients and constituents the organization was created to help.

Structure Of Bank Accounts For A Nonprofit Organization

Suppose Onandon has a bingo game at which cards are sold for $15 apiece. If 200 cards are sold, the net cash deposit should be $3,000.

One obvious answer is to have someone who is not paying bills review processed checks from the bank. Most banks these days keep the actual checks, but provide images of the checks as part of the bank statement. Some will charge a fee for this service but it is well worth it. Organizations should use a system of general ledger accounting which enables categorizing and tracking income and expenditures.

The requirements for each funding source may be unique and complex. Very helpful, and validating for us, as we are following many of the suggestions. We go through a mandatory audit every year and the internal controls issue comes up because we’re small. We are also told that having an accounting manual that details our policies & procedures with all financial matters is critical. My question is this, they have hired me, an accountant to come in and be the bookkeeper but they won’t allow me to print checks or reconcile the bank account. The Business Manager is the one who won’t let me do this and he is also a check signer and often takes checks out of the office.

Mission Statement

As a reference document, when filing for your tax-exempt status, it is good practice to include your bylaws if they have already been drafted. When incorporating your organization, your bylaws can provide helpful information on your organization. Yes, nonprofits can engage in revenue-generating activities that result in annual surpluses or profits. The distinction between nonprofits and for-profit companies is what happens to the surplus. For-profit businesses may distribute their gains to the owners or shareholders.

Fortunately, there are a number of apps available now that will serve as a “vault” for all your passwords. One we like is called “LastPass,” which has both a free and a premium version.

• Ask each board and staff member to agree in writing to uphold the policy.
• Suddenly the controls we had seemed much more important, but I have been struggling with how to reorganize our efforts except that I am recruiting a new treasurer, bookkeeper and creating a finance committee.
• Fortunately, there are a number of apps available now that will serve as a “vault” for all your passwords.
• In addition to carefully defined risk-management procedures, it is wise for an organization to complement its indemnification clause by purchasing Directors’ & Officers’ (D&O) insurance.

Some nonprofits develop more comprehensive and detailed policies that incorporate more specific responsibilities and add more detail. The most important action is to create and adopt a policy that meets your organization’s needs. If the idea of creating a financial policy seems daunting, this basic guideline for policy development may be helpful.

Standard Practices For Nonprofit Treasurers

Because they fall short of revocation of tax-exempt status, these provisions are called intermediate sanctions. There are many other examples of fraud, from employees stealing inventory or office supplies to management staff with payroll service access giving themselves unauthorized raises. The point is that unfortunate as it may be, fraud is on the rise in the nonprofit world, and being good stewards of your organization means addressing the issue, no matter how uncomfortable it may be. Here are four actual cases of fraud I discovered, along with some suggestions for simple internal controls that can help keep these things from happening. In smaller organizations with few or no paid staff, this responsibility is generally fulfilled by a volunteer board or committee member.

The bylaws define the purpose of the organization, what its banking and investment authorities are and the contact information of those who created the organization and who run it. Generally, the bank requires the president, vice president, treasurer and secretary to be signers on the account. The first thing a nonprofit organization will need to open a bank account is to be incorporated as a nonprofit in the state it does business in and to obtain a tax identification number. This is the number the bank uses for the bank account when opening it and sends any interest accumulation notices to the IRS based on this number.

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Establish a cash management policy that dictates an appropriate level of reserves and a plan for establishing a reserve fund and the process for drawing funds from reserves. Review insurance coverages to ensure risk of loss is properly mitigated and ensure insurance policies are renewed. Develop annual budgets that provide clear direction for all organizational spending. This practice is often more effective and efficient to implement than requiring that all checks have a mandatory second signature. A collaborative national project calling on board members to advance their nonprofits’ missions through greater advocacy. Learn about relief funds governments have available to invest in nonprofits and how to advocate for them. Let me tell you the story of a client who owned a convenience store.

For the purposes of accountability, it’s good practice for nonprofit organizations to require two signatures, which are usually the signatures of two officers. Most treasurers also require outgoing checks to have a corresponding invoice, receipt or voucher. Our bank statement is sent to a CPA firm directly from the bank. The controller sends the CPA firm the list of checks issued during the month and the CPA firm reconciles the bank statement, taking the task out of the office and our hands. This firm doing this has a small “back office” service doing “bank recs” and other tasks for small companies and non-profits, billing by the hour for a bookkeeper, not a CPA. (This is not the same firm that does our audit, adding another layer of separation.) This solution might work for you, too–if you can fit it in your budget. The number one internal control to pay attention to is segregation of duties.

The National Council of Nonprofits is a proud 501 charitable nonprofit. Find principles of good governance and ethical & prudent practices for your nonprofit. Preserving the Johnson Amendment to remain above the partisan fray is vital to nonprofit missions.

Checks and other expenditures should be examined to verify that the payments are consistent with the organization’s activities and that the expenditures were appropriate. Similarly, deposit activity should also be reviewed to ensure that it corresponds to expected revenues. For example, if the organization held a fundraising event that generated cash, the reviewer should look to see that there are cash deposits that correspond to the event. If the organization banks online, it should still be sure it is regularly downloading or printing and storing its bank statements, deposit slips, check images, and similar documents. Financial controls are often referred to as internal controls. The following is a list of minimum internal controls that should be in place in any non-profit organization, regardless of size.

If the organization has cash fund raisers such as dinners, car washes, bingo games and so on there ought to be budgets for each event. In the case of fund raisers such as car washes, bingo games and the like it is fairly easy to test for cash theft. Establish internal accounting systems, including checks and balances, so one staff member does not have total control over finances. Effective internal controls limit any single individual from having control over two or more phases of a financial transaction or operation. A periodic review by an objective person of the list of all vendors receiving fees/checks from the nonprofit . I run a small nonprofit that went from a 7000 budget to over 100,000 in 2 years. Suddenly the controls we had seemed much more important, but I have been struggling with how to reorganize our efforts except that I am recruiting a new treasurer, bookkeeper and creating a finance committee.

At the very minimum, you MUST have the credit card statements sent directly from the bank to someone OTHER THAN THE BOOKKEEPER! In many fraud cases, the bookkeeper sets up a phony vendor and then issues checks to her phony vendor business. I have yet to meet a small business owner who could not spot a phony vendor name. At every bank, officers and tellers are REQUIRED to take at least 2 consecutive weeks of vacation every year.

If the same person does both, there should always be two people counting and verifying deposits. All nonprofits and their board members are encouraged to be active advocates of their mission. However, the IRS allows 501s to engage in lobbying only as long as it is not a “substantial part” of their activities. The board received reports and statements showing who got paid for what and when. The bank will require a copy of the bylaws to be maintained on file for the account of any nonprofit organization.

A board member serves on two boards in the community and finds himself in the position of approaching the same donors on behalf of both organizations. One of the most powerful safeguards of nonprofit integrity are individual donors and members. By giving or withholding their financial support, donors and members can cause nonprofits to reappraise their operations. BoardSource has been fielding governance-related questions posed by nonprofit leaders for over 30 years.

Share the story of your nonprofit’s impact and help us tell the story of the nonprofit sector. We need a system to make sure that workers are not being abused by managers. I am a fan of Roboform myself but the issue seems to be a need to share instead of secure. Are you suggesting that each person be given the LastPass password and have it installed on their computer? Interesting thought and it allows them to share the passwords securely with automatic sync. Online security is becoming a bigger issue all the time, and you are right to be concerned about passwords being saved in a manner that is not secure.

The treasurer must be certain that all accounting records and books are up to date at all times to avoid any suspicion of wrongdoing. In addition, most nonprofits limit the length and number of terms their board directors and officers serve, so it’s important for current treasurers to get things ready to transfer duties to a new treasurer. The outgoing treasurer will want to make sure that all financial matters are current and clearly laid out so that it will be a smooth transition for the incoming treasurer. Onandon is a non profit organizations devoted to helping the children of parents who were excessive talkers.