It may seem obvious that bookkeeping and accounting are different in the Not for Profit world, but not every not for profit seems to have received the memo. At the core of every not for profit, in order to function successfully, is to establish trust with a donor base.
One way to accomplish this is to establish a solid bookkeeping and record keeping system that is transparent to donors, board members, and governing agencies. It isn’t uncommon for one to see reports in the news of poor accounting principles that have allowed for poor human behavior. Even the smallest organizations, such as sports booster clubs, or other groups, can and should adhere to strict guidelines when it comes to financial management. If you are involved in a not for profit, either as a donor, or a board member, here are four questions to ask of the organization.
1. Are Internal controls put into place, which enable the organization to safeguard its assets?
Examples would be requiring two signatures on all checks payable to an outside party, or having one person write the check, while a separate person signs the check. Another example would be to have the person who ordered goods or services approve an invoice, but to have the invoice paid by the person who oversees the entire budget. The more segregated the duties are internally; the less likely an error or misappropriation of funds will occur.
2. Are external resources utilized to complement or support the internal processes, when the organization is of a size or volume that exceeds the internal capacity?
An organization, which reaches a size or capacity where internal controls are no longer sufficient, does not justify inadequate controls. It emphasizes the need to constantly evaluate the cost of the internal controls to make sure resources are used efficiently and to seek outside resources.
3. Is there an external oversight or audit of all financial activity?
Depending upon the status of the not for profit, an external audit may be mandated by the state or federal government. However, there are numerous small charitable organizations that do not fall within this framework. Having some type of accounting audit is a good idea no matter the size or organization type. Not only does it encourage ethical guidelines, whomever is providing the services can give good feedback on how processes should be set up, or achieved to ensure the safety and security of the organization’s finances.
4. Has the organization developed governance and policy guidelines?
The role of a board of directors is to govern the organization, and with the governance the expectation is that it will lead the organization by respecting all the bylaws, abide by strict ethical standards and be accountable for the organization’s actions. To achieve this boards develop bylaws and guidelines for everything including budgeting and financial activity and reporting. It is this governance, which leads the organization to earn the public’s trust.
Inherent in managing a not for profit organization is the necessity to earn and retain trust. Once it is damaged it can be very difficult to gain back. For that reason, solid accounting and record keeping practices are vital to the health of all not for profit organizations.