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The Importance of Effective Monitoring Controls for Nonprofits

By: Marcus Frank, CPA, Senior Accountant

Not-for-profit organizations often find themselves short on adequate resources to implement the ideal internal control environment, especially regarding segregation of duties. Adequate segregation of duties exists in larger for-profit entities but is difficult to achieve in some smaller not-for-profit organizations. Even for those not-for-profit organizations that have adequate resources and staff to allow for proper segregation of duties, monitoring controls can serve as compensating controls. Continuous monitoring enables management and board members to continually review an organization’s operations and financial activity.

Monitoring controls are actions performed at the management level designed to provide assurance that information on the operations is appropriate, appears reasonable, and is prepared consistently. Below are some examples of various monitoring controls:

  • Comparing monthly or quarterly financial activity to budgeted activity and investigating any unexpected variances. Management and the board have certain expectations of revenues and expenses, in addition to how they should fall out in comparison to the budget. Monitoring this financial activity on a more frequent basis will help identify potential financial problems.
  • Have management and the board review monthly or quarterly expenses at board meetings. Review the disbursement register for reasonableness. Investigate any unknown and new payees. If the organization’s bank statements provide imaged cleared checks, review those for reasonableness. Monitoring activities like these will help provide some detective procedures around disbursements and provide another set of eyes to oversee cash outflows.
  • On a haphazard basis, have management or a qualified board member review various account reconciliations. This will ensure that financial activities are being performed timely and create a secondary level of review.
  • Review monthly accounts receivable and accounts payable aging reports for stale items.
  • If an investment policy has been implemented, ensure that the board understands it. Management should also monitor the investments to ensure they comply with the policy.

These are just a few high-level activities that can keep management and the board more in tune with the financial activities of a not-for-profit organization on a more regular basis. The more familiar management and the board is with the high-level financial activities of an organization, the more likely they are to be financially successful.

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