Jitasa Nonprofit Blog

Does Your Nonprofit Have the Proper Internal Controls? Part 1

Every month several news article are published about an employee at a nonprofit that was caught in fraudulent behavior.  Unfortunately, the 'do good' mission of nonprofits and their staff do not necessarily make them less susceptible to incidences of internal fraud. According to the 2012 Report to the Nations on Occupational Fraud & Abuse by Association of Certified Fraud Examiners, the median loss related to fraud for a nonprofit is $100,000 per occurrence. When it happens, it not only depletes the organization of precious financial resources, but also damages the nonprofit’s reputation among its donor community.

A 2010 study of Australian and New Zealand nonprofits by BDO, LLP attributes their countries' four year decrease in the incidence of fraud and in severity of the frauds to an increased awareness in the nonprofit sector about internal controls.

So what exactly are internal controls and why are they so important?

Internal controls are an organization’s plans, methods, and procedures implemented for the purpose of achieving its missions, goals, and objectives. In addition, internal controls are important to put in place within any organization, for profit or nonprofit because they serve as the first line of defense in safeguarding assets and detecting and preventing errors, fraud, and impropriety.

Fraud occurs when you have 1) opportunity, 2) need, and 3) rationale.  While you can not directly safeguard against an employee's need and rationale, internal controls focus on minimizing opportunities for fraud.

A critical component of designing and implementing internal controls, are control activities, which include but are not limited to: separation of duties, authorizations, documentation, and audits.

Come back tomorrow to find out more about these four key control activities you can put in place to minimize opportunities for fraud...

Jon Osterburg, Manager of Client Services, Jitasa
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