As the season of gratitude unfolds, it’s a perfect time for nonprofit organizations to reflect on the foundational elements that safeguard their financial integrity and reputation. Let’s express thanks for these 6 essential nonprofit accounting standards. They not only help mitigate fraud risk but also ensure a well-run and well-respected accounting function.
1. Segregation of Duties
Segregation of duties is a critical internal control mechanism that helps prevent fraud and errors. This practice involves dividing responsibilities among different people to reduce the risk of error or inappropriate actions. Separating the steps involved in processing financial transactions ensures that no single person has too much control –– from recording to review, and approval to reconciliation. In addition to promoting cross training for employees, segregation of duties is a simple yet effective strategy for safeguarding an organization’s assets.
2. Reconcile, Reconcile, Reconcile
Reconciliation is the cornerstone of sound financial management. Regularly reconciling bank statements, investment accounts , and all other asset and liability accounts across systems helps in detecting discrepancies early on. It’s not just about balancing numbers but also about ensuring that every transaction is accounted for and legitimate. This practice is not simply a routine task but a vital health check for the financial well-being of your nonprofit.
3. Run Analytics on Financial Statements to Detect Irregularities
In today’s digital age, leveraging analytics in financial management is not just an advantage but a necessity. Regular analysis of financial statements using analytical tools can unearth inconsistencies and patterns that might indicate errors or fraud. It’s not just about looking at numbers but understanding the story they tell. This process is like a detective carefully examining clues to solve a mystery, where the mystery is ensuring the financial integrity of your nonprofit.
4. Keep a Current Accounting Manual and Standard Operating Procedures
Documenting accounting procedures and policies in a manual is like setting up a roadmap for financial management. A well-maintained current accounting manual ensures consistency in financial processes and helps in training new staff. It’s a repository of the organization’s collective financial wisdom, acting as a guidebook for both ongoing tasks and unusual financial scenarios.
5. Conduct Regular External Reviews or Audits
Regular external audits or reviews, even if not legally required, are a hallmark of transparency and accountability. These audits provide an independent assessment of your financial practices and help in identifying areas for improvement. Think of them as a seal of approval from an objective source that reinforces the credibility of your financial statements to donors, grantors, and the public.
6. Engage Boards Regularly in Financial Reviews
Board members should review and approve financial statements at least quarterly, and a finance committee should review statements monthly. This not only helps the board fulfill its fiduciary responsibilities, but it also provides them with the data and understanding required to provide strategic guidance to your nonprofit. Board members should also review annual budget drafts and approve budgets well before the new fiscal year begins.
In summary, these six best practices are not just about compliance or meeting standards. They are the pillars upon which the financial health and integrity of a nonprofit rest. In this season of giving thanks, let’s appreciate the role these practices play in keeping our nonprofits transparent, accountable, and respected. As stewards of public trust and funds, embracing these practices is not just a choice but a responsibility we owe to our beneficiaries, donors, and society at large.
From all of us at Chazin & Company, we wish you a Happy Thanksgiving. May this season bring you joy, peace, and gratitude as we celebrate the blessings of the past year and look forward to continued success and collaboration in the future.
Chazin & Company
With over 19 years working exclusively with nonprofits, we pride ourselves in having a unique understanding of nonprofit accounting needs. We believe that nonprofits deserve personalized, quality service and should not settle for a one-size-fits-all approach. We collaborate with you to provide a fully virtual and customized solution that is not only cost-effective but also strengthens your accounting function. We offer a team of industry experts at your disposal to provide advice, leading technology, and to supplement existing staff to improve efficiency and compliance.