Is it possible for a small organization to still have a system of effective internal controls?
Although it may not seem possible at times, because of limited resources and limited staffing, a system of effective internal controls is not only possible but is vital for a small organization.
In a 2014 study by the Association of Certified Fraud Examiners (ACFE), small organizations are the most susceptible to occupational fraud. The study found that the median loss for a small entity was $154,000 while the median loss for a large entity was $160,000. Although larger entities suffered the largest losses, a loss of $154,000 for a small entity has a larger impact as it can completely destroy a small entity.
The good news: there are a number of steps a small organization can take to prevent such a large loss.
Fundraising events may be one of the biggest streams of revenue for a small nonprofit organization. A simple step to take during a fundraising event is to always ensure there are two people handling the cash. At the end of the day, the individuals should count the cash independently and agree their totals. Total cash should be deposited and communicated to bookkeeping immediately. The study by the ACFE also found that skimming is greater in smaller entities than it is in larger entities. Specifically, skimming accounted for 17% of the small entity cases while skimming accounted for only 10% of the larger entity cases.
Additionally, when there is limited staffing in an organization, it could be necessary to have board members involved, beyond just attending board meetings. A board member’s involvement could include check signing authority or reviewing monthly bank reconciliations.
Using an outside vendor for payroll could help to enhance controls when the organization establishes proper controls before and after processing. Even though payroll might be outsourced, management or board involvement is still very important. Management or a member of the board should be involved in the payroll review process to ensure payroll is in line with documented salaries and deductions. The study by the ACFE also found that payroll related frauds accounted for approximately 17% of the small entity cases while they only accounted for approximately 8% of the larger entity cases.
Limited resources and limited staffing should never be an excuse for a small organization when it comes to internal controls. An organization is never too small for internal controls. Every nonprofit organization, whether big or small, has a mission that is extremely important to them and to the donors that support them. Believing in and establishing a system of effective internal controls is vital to carrying out that mission effectively.
-Katrina M. Gochenour, CPA