best practices in financial controls - · pdf file•internal controls are policies and...

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Best Practices in Financial Controls Length of session recommendation: 90 minutes Audience: EDs and Board Members Facilitator: Chris Darling, UPS, Susan K. Miller, CPA, and Susan Kenney, CPA This session will cover specific areas that Executive Directors, staff, and boards should know about their financials. It will help you understand what you are required to do and what is recommended, and what effective management practices will help maintain financial health and proper accountability. Financial Internal Controls and Accountability – Risk and Fraud Why are internal controls so important? As the system of policies and procedures that protect the assets of an organization, this discussion will set the tone for the session. We will discuss the importance of reliable financial reporting, compliance with laws and regulations, and effective and efficient operations, in order to mitigate risk or liability. Audits and the Audit Committee The word “audit” often produces panic, fear, and uncertainty. Yet audits are simply a factor in providing proper financial management oversight of an organization. Discover what audits are and how audits can help you improve your operations and better serve your mission. Finance Controls Best Practices Review of standard finance controls - procedures followed by successful organizations to help them safeguard assets and ensure their reputations remain above reproach. Nonprofit Financial Reports Learn how the four primary financial reports produced: Statement of Financial Position (Balance Sheet), Statement of Activities (Income Statement), Functional Expense Schedule (required for most organizations similar to the ToolBank), and Statement of Cash Flows, interrelate and how your operational decisions impact them. How are the financial statements for nonprofit organizations similar and different from those of for-profit organizations? In-Kind Description and Valuation Nonprofits are often the recipients of donations of goods and services, and must report the value of these gifts on their financial statements. In-kind value may be determined by the donor or by the nonprofit organization, and booked as such. Review of how in-kind should be represented on financial statements and IRS requirements. Tool Depreciation Tool Depreciation is of particular concern to our ToolBanks. We will review a recommended calculation for depreciating tools in inventory if you are not already doing so. QUESTIONS

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Page 1: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Best Practices in Financial Controls

Length of session recommendation: 90 minutes

Audience: EDs and Board Members

Facilitator: Chris Darling, UPS, Susan K. Miller, CPA, and Susan Kenney, CPA

This session will cover specific areas that Executive Directors, staff, and boards should know about their financials.

It will help you understand what you are required to do and what is recommended, and what effective

management practices will help maintain financial health and proper accountability.

Financial Internal Controls and Accountability – Risk and Fraud

Why are internal controls so important? As the system of policies and procedures that protect the assets of an

organization, this discussion will set the tone for the session. We will discuss the importance of reliable financial

reporting, compliance with laws and regulations, and effective and efficient operations, in order to mitigate risk or

liability.

Audits and the Audit Committee

The word “audit” often produces panic, fear, and uncertainty. Yet audits are simply a factor in providing proper

financial management oversight of an organization. Discover what audits are and how audits can help you

improve your operations and better serve your mission.

Finance Controls Best Practices

Review of standard finance controls - procedures followed by successful organizations to help them safeguard

assets and ensure their reputations remain above reproach.

Nonprofit Financial Reports

Learn how the four primary financial reports produced: Statement of Financial Position (Balance Sheet),

Statement of Activities (Income Statement), Functional Expense Schedule (required for most organizations similar

to the ToolBank), and Statement of Cash Flows, interrelate and how your operational decisions impact them.

How are the financial statements for nonprofit organizations similar and different from those of for-profit

organizations?

In-Kind Description and Valuation

Nonprofits are often the recipients of donations of goods and services, and must report the value of these gifts on

their financial statements. In-kind value may be determined by the donor or by the nonprofit organization, and

booked as such. Review of how in-kind should be represented on financial statements and IRS requirements.

Tool Depreciation

Tool Depreciation is of particular concern to our ToolBanks. We will review a recommended calculation for

depreciating tools in inventory if you are not already doing so.

QUESTIONS

Page 2: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Financial Internal Controls & Accountability

Chris Darling

February 2016

16

Page 3: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

• Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting, promote compliance with laws and regulations, and facilitate effective and efficient operations.

• It is important to form internal controls for:

• Handling funds received and expended by the organization

• Preparing appropriate and timely financial reporting

• Conducting a minimum of annual audits of financial statements and core processes

• Evaluating staff and programs

• Maintaining inventory records of real and personal property

• Implementing personnel and conflict of interest policies

Internal Controls & Accountability 16

Page 4: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Core Processes & Key Controls

At the center of all business processes the key controls are quality, accuracy and timeliness

16

Quality

Timeliness

Accuracy

Billing

Collections

Accounts Receivable

Accounts Payable

Payroll

Audit

General Ledger

Page 5: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

• On average typical organizations can lose 5% of annual revenue to fraud. Fraud schemes in nonprofits can include check fraud, embezzlement, ghost employees, expense fraud, misappropriation of funds for personal use, fictitious vendor schemes, kickbacks from unscrupulous vendors, and outright theft of cash or assets

• Beyond financial loss however, an even greater potential cost of fraud to non profit organizations is the reputational damage that can occur

• At the same time, non profits are especially vulnerable to fraud

• Many times, employees are volunteers who are passionate about the mission, but may not be well versed in financial issues and internal controls

• Many nonprofits distribute grants, scholarships, awards, or other types of financial aid to outside agencies or individual recipients

• Nonprofits with small staff often make segregation of duties more difficult

• Nonprofits tend to have large amounts of cash and checks coming in from various sources, making them vulnerable to skimming or cash larceny

• Struggling agencies also frequently experience relatively high staff turnover, making training and adequate segregation of duties more difficult

• Many nonprofits depend heavily on volunteers and other community members, which can further complicate efforts to establish or maintain internal controls

Fraud 16

Page 6: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

• One area in which nonprofit organizations seem particularly vulnerable is billing schemes, in which an employee fraudulently submits invoices to obtain payments he or she is not entitled to receive

• Other scams include:

• Pay-and-return schemes that cause overpayments to legitimate vendors. When an overpayment is returned, it is embezzled by the employee

• Ordering personal merchandise that is inappropriately charged to the organization

• Deceptive fundraising

• Fictitious vendor schemes

• Payroll schemes

Fraud 16

Page 7: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Four Warning Signs of Fraud 16

Lack of Controls

• Unwillingness to remediate gaps

• Poor “tone from the top”

• Inconsistent or nonexistent monitoring controls

• Inadequate segregation of duties

• Lax rules regarding transaction authorization

• Failure to reconcile accounts in a timely manner

Behavior

• Financial difficulties or generally living beyond one’s means

• Divorce, family problems, or addiction problems

• Past employment-related or legal problems

• An unusually close association with vendors or recipients of grants

or services

• Control issues and a general unwillingness to share duties

• Refusal to take vacations

• Irritability or defensiveness

• Complaints about inadequate pay, lack of autonomy or authority

Data

• Transactions conducted at unusual times of day, on weekends or

holidays, or during a season when such transactions normally do

not occur

• Transactions that occur more frequently than expected — or not

frequently enough

• Accounts with many large, round numbers or transactions that are

unusually large or small

• Transactions with questionable parties, including related parties or

unrecognized vendors

Documents

• Missing or altered documents

• Evidence of backdated documents

• Missing or unavailable originals

• Documents that conflict with one another

• Questionable or missing signatures

Page 8: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

• Form an effective and empowered audit committee or equivalent, with at least one financial

expert

• Establish and enforce a system of effective controls. Common tools include security and access

controls, such as dual authority or monetary authorization limits, as well as audits, inspections,

and transaction monitoring

• Establish the right tone from the top. Actively and visibly promoting a culture of integrity and

ethics will embolden honest employees to put a stop to fraud

• Provide a clear process for reporting suspicious behavior

• Develop a response plan in case deterrence fails

• Confront the issue openly and directly

John Hall, CPA “Fraud & Internal Controls”

Anti-Fraud Principles 16

https://www.youtube.com/watch?v=lQI84RuiYas

Page 9: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Audits & the Audit Committee

Chris Darling

February 2016

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Page 10: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

• A nonprofit can build its reputation for integrity, transparency, and professionalism, by having a regular independent audit conducted and making it available to stakeholders and the public

• The size of the organization’s audit committee could be small; about two to three people

• Well-informed internal audit team/committee can help make processes run more smoothly

• Given the high turnover of board members and officers, as well as the volunteer nature of these positions, small nonprofits may experience difficulty finding volunteers with adequate business and financial qualifications. Furthermore, the turnover of these individuals makes continuity of oversight and fiscal initiatives more difficult

• Audits can provide assurance that an organization is operating with integrity and is using acceptable accounting guidelines. Such assurance is often relied on by banks for financing decisions and by donors for gift-giving determinations.

• Almost all AFF boards have CPAs and are serving as Treasurers. This is a good practice to always have such the skill on your board.

How can audits better serve us?Audits provide an organization a “clean bill of health”

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Page 11: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

• The committee establishes procedures for accepting confidential, anonymous concerns relative to financial reporting and internal control matters.

• Often referred to as a “whistle-blower policy,” the procedures allow individuals to bring questions and issues to light without fear of retribution

• Hidden problems can be discovered early and dealt with before they grow into something dangerous

• Potential issues can be mitigated prior to serious ethical or legal compromise

• Audit Committees can work with any external auditors

• Having a structured Audit Committee in place can inspire confidence in perspective donors

Audit Committee Benefits16

Page 12: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

REQUIRED:

• Execution of an annual financial review, to be conducted by an independent ‘third party’ licensed accounting firm that is not represented on the ToolBank board of directors, and has not donated cash or in-kind resources to the ToolBank under review within the last 12 months.

• The annual review may not be conducted by the finance committee nor any current member of the board of directors, to avoid a conflict of interest.

• The annual review must be completed no later than June 30, with the findings report shared with ToolBank USA shortly thereafter.

• Newly-incorporated ToolBanks must conduct their first annual financial review in the calendar year that follows the calendar year in which the ToolBank opens for lending. The ToolBank’s first financial review must reach back to the ToolBank’s date of incorporation, and up to the most recent completed calendar year.

RECOMMENDED:

• While the annual independent financial review is a minimum requirement, ToolBank USA’s strongly asserts that an independent audit serves as the most valuable method of annual financial examination. Each ToolBank has the authority to determine if and when to set aside the review in favor of an audit, based on the goals of the organization, and the standards of the ToolBank’s local philanthropic community. The annual audit is also subject to the June 30 deadline.

ToolBank Annual Financial Examination16

Page 13: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Best Practices in Financial Controls

Susan K Miller CPA

Susan Kenney CPA

16

Page 14: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Bank Account Requirements• Account signatories: President,

Treasurer, and Executive Director

• Background checks before hiring

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Page 15: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Corporate Check Card• Before Executive Director is hired, Treasurer

obtains check card with ToolBank’s name and Treasurer’s name on front

• Executive Director obtains all receipts for record keeping and keeps them on file

• ToolBank USA may be used as a credit reference to obtain card

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Page 16: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Deposits• Make deposits at least twice per month

• Deposit all cash and/or checks over $5,000 within two business days

• Keep deposits in secure place

• Classify the donation by account in QuickBooks (or other accounting software) according to intended purpose

• Record and file photocopies of all donor checks and correspondence with date of actual receipt

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Page 17: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Purchases• < $1,000 made by Executive Director (ED)

with corporate check card• >/= $1,000 by paper check signed by ED• > $5,000 require two signatures• > $2,500 requires finance committee

approval• Budgeted funds spending does not

require approval

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Page 18: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Payroll payments

• Timely

• Accurate

• Consider use of payroll-service

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Page 19: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Bank Reconciliations• Reconciled by non-signer (CPA

and/or professional accountant, Treasurer)

• Reconciled on Monthly basis

• Reconcile and review compliance with internal control procedures

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Page 20: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Consider reconciliation between donor software and accounting software

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Page 21: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Internal Controls/Preventing Fraud• Segregation of Duties

• Proper Oversight

• Insurance to reimburse for loss due to employee dishonesty

• What can go wrong?

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Page 22: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Monetary Donations• Executive Director sends confirmation

of receipt of gift to donor including:• Written acknowledgement for tax

deduction purposes• Dollar amount• Date received• No goods or services provided

• Send within seven days of gift receipt

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Page 23: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Annual Financial Examination

• Review - minimum requirement

• Audit is recommended

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Page 24: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Questions?

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Page 25: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Contact Information

Susan Miller, CPA678 595 5583

[email protected]

Susan Kenney, CPA770 751 6805

[email protected]

16

Page 26: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Non Profit Financial Statements

Susan K Miller CPA

Susan Kenney CPA

16

Page 27: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Financial statements provide the user a picture of the Organization and how it accomplishes its mission

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Page 28: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Statement of Financial Position

Balance Sheet

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Page 29: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 30: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 31: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 32: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 33: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Statement of Activities

Income Statement

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Page 34: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 35: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 36: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 37: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 38: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 39: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 40: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Statement of Functional Expense

No Equivalent in For Profit World

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Page 41: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Functional Expense Schedule divides Expenses into:

• Program

• Management & General

• Fundraising

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Page 42: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 43: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 44: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 45: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Cash Flow Statement

Cash Flow Statement

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Page 46: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 47: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 48: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Questions?

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Page 49: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Contact Information

Susan Miller, CPA678 595 5583

[email protected]

Susan Kenney, CPA770 751 6805

[email protected]

16

Page 50: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Gifts in KindFinancial Statement Requirements

IRS Requirements

Susan K Miller CPA

Susan Kenney CPA

16

Page 51: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Financial Statement Requirements

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Page 52: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Types of Donations received

• Tools and Supplies

• Long Lived Assets

• Services

• Facilities

• Marketable Securities such as stock

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Page 53: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Valuation of Tools & Supplies

• Fair Value in the period received

• Use Market Value price

• Obtain Value from:• New - Hardware Store (Catalog,

website, etc.)• Used – eBay, Craigslist, or similar

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Page 54: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Retain documented evidence of -

• Description of product or service received

• Date received

• How value was determined

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Page 55: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Record donations as -• Fair Value of contribution as

contribution revenue and asset or expense

• Journal Entry in Financial Statements/General Ledger

• Amounts should be accumulated and posted monthly, quarterly, or annually

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Page 56: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

IRS Requirements

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Page 57: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

IRS Requirements for Gifts in Kind

• Name of Organization

• Amount of cash contribution

• Description (but not the value) of non-cash contribution

• Statement that no goods or services were provided by the organization in return for the contribution, if that was the case

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Page 58: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Additional Information:www.irs.gov – Publication 1771, Charitable Contributions Substantiation

and Disclosure Requirements

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Page 59: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

If you cannot use it –Don’t record it

Consider developing a gift acceptance policy

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Page 60: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 61: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Develop a Standardized Form

• To serve as an acknowledgement to donor – give copy to donor

• To give evidence to support internal valuation of donation – keep copy for your files with documentation

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Page 62: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

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Page 63: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Questions?

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Page 64: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Contact Information

Susan Miller, CPA678 595 5583

[email protected]

Susan Kenney, CPA770 751 6805

[email protected]

16

Page 65: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

Depreciation

Chris Darling

February 2016

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Page 66: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

• Straight line depreciation is calculated by taking the purchase or acquisition price of an asset subtracted by the salvage value divided by the total productive years the asset can be reasonably expected to benefit the company ("useful life")

• Non-profit organizations are permitted to adopt a policy that gifts of long-lived assets have an implied time restriction that is satisfied over the life of the asset by recognizing a portion of the gift equal to depreciation each year.

• For physical assets that get depreciated, this is the approach recommended

• For gifts of assets that don’t get depreciated, such as land, non-profits are permitted to segregate operating and non-operating items in Financial Statements of Activities

• Depreciation items is especially recommended for non-profits in order to avoid large capital gifts causing misleading surpluses and deficits in financial statements

• Misleading surpluses and deficits can mask the true financial standing of a non-profit and impact their position to receive grants and other in-kind donations

Straight Line Depreciation Overview16

Page 67: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

(Purchase Price of Asset - Approximate Salvage Value) ÷ Estimated Useful Life of Asset

Example: You buy a new computer for your business costing approximately $5,000. You expect a salvage value of $200 selling parts when you dispose of it. In the past, your business has upgraded its hardware every three years, so you think this is a realistic estimate of useful life.

Using that information:($5,000 purchase price - $200 approximate salvage value) ÷ 3 years estimated useful lifeThe answer, $1,600, is the depreciation charges your business would take annually if you were using the straight line method.

Salvage or residual value should be estimated based on historical data tracked within an organization/similar organizations

Straight Line Depreciation Calculation16

Page 68: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

• Low cost tools such as hammers, power saws, drills, floor-cleaning machines, and so on should be capitalized and depreciated over their expected useful lives. Keeping a separate depreciation schedule for each screwdriver or tool is not necessary

• Depreciation should be calculated not for the individual asset but as a class of assets, networks of assets and subsystem of assets

• Most businesses set minimum dollar limits below which costs of fixed assets are not capitalized but are charged directly to expense. This is accepted practice; CPA auditors tolerate this practice as long as a business is consistent one year to the next

• Suggested Depreciation schedule of suggested life for capital assets*

• For example:

• Hammers, drills, saws, sanding machines, workbenches have an estimated useful life of 10 years in general

*Depreciation schedule recommended by South Dakota state government audit, but falls in line with similar schedules found

Tool Depreciation16

Page 69: Best Practices in Financial Controls - · PDF file•Internal controls are policies and procedures that protect the assets of an organization, create reliable financial reporting,

1/29/2016 www.aicpa.org/InterestAreas/NotForProfit/Resources/GovernanceManagement/Pages/fraud­prevention­and­internal­controls.aspx?action=print

http://www.aicpa.org/InterestAreas/NotForProfit/Resources/GovernanceManagement/Pages/fraud­prevention­and­internal­controls.aspx?action=print 1/2

An Ounce of Prevention: Combatting Fraud in Not­for­Profits  Tips for Designing Internal Controls to Protect Your Organization by Not­for­Profit Section Published January 11, 2016

Fraud is a risk in all types of businesses. Unfortunately, charitableorganizations and not­for­profits (NFPs) are not immune. According tothe 2013 Marquet International, Ltd.  , NFPs,including charitable and religious organizations, accounted for 11.9%of all of the fraud cases included in its report. However, according toUrban Institute, the NFP sector only represents 5.4% of US GrossDomestic Product. An argument can be made that NFPs are twicemore likely to be victims of fraud than other businesses.

Why are NFPs more likely to be victims of fraud? Due to their charitable or mission focus, NFPleaders are often more trusting of employees and volunteers. Further, many NFPs are subject tobudget constraints and misguided incentives to maximize resources spent directly on missionachievement to the detriment of critical administrative support, accounting and internal controls.Typically, employees of NFPs are paid less than their counterparts in the private sector. Thismay be especially true for administrative positions, which are frequently understaffed comparedto private sector entities. These factors, along with limited administrative and accounting andfinance functions, may hinder internal controls and increase fraud risk.

Tim Delaney, chief executive of the National Council of Nonprofits observed, “The sector as awhole can’t afford the reputational damage from even the hint of fraud.” Public response to fraudin NFPs is likely to be negative regardless of the monetary amount of the theft or defalcationsimply by raising concerns over management’s ability to fulfill its duty to protect NFP’s assets.How does one maximize the effectiveness of internal controls in a cost effective manner? Thekey is to tailor and scale controls to address risks within your organization.

The risks you need to address are those that make you the most vulnerable to fraud.  Accordingto the Marquet Report, approximately 90% of fraud is committed by employees of theorganization acting alone.

Examples of appropriate preventive and detective controls that you could consider to reduce therisk of a fraud include the following.

Safeguarding Assets

Physically secure assets such as inventories and equipment 

Conduct thorough background checks on employees, especially accounting staff

Bond all employees who handle cash and checks

Consider the use of non­scanable check stock

Keep check supplies under lock and key

Log and restrictively endorse checks received by mail 

Use bank lockbox services whenever possible

Segregation of Duties/Monitoring

Monitor daily account activity

Review payroll including names and pay rates

Reconcile bank statements in a timely manner

Have bank statements sent offsite to the CEO, CFO or Treasurer for review prior toreconciliation

Compare logged cash receipts to actual deposits

Have copies of credit card statements sent offsite for review prior to payment

Policies and Procedures

Report on Embezzlement

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1/29/2016 www.aicpa.org/InterestAreas/NotForProfit/Resources/GovernanceManagement/Pages/fraud­prevention­and­internal­controls.aspx?action=print

http://www.aicpa.org/InterestAreas/NotForProfit/Resources/GovernanceManagement/Pages/fraud­prevention­and­internal­controls.aspx?action=print 2/2

Prohibit use of acronyms when writing checks or on check endorsements

Prohibit writing of checks to “cash”

Implement an approval process for new contractors and vendors

Encourage supporters to use the full name of the organization rather than an acronym

Require dual signatures for approval of checks and expenses over designated limits and forunbudgeted items

Prohibit accounting personnel from signing checks or transferring funds

Require all employees, but especially accounting and finance employees, to take at leastone uninterrupted week of vacation a year

Minimize carryover vacation time

A widely distributed and rigorously followed Whistleblower Policy that indicates a procedure forreporting concerns of fraud without fear of retaliation is an essential tool in fraud detection.According to the Association of Certified Fraud Examiners (ACFE), 2014 

, tips are consistently and by far the most common frauddetection method. Over 40 percent of all cases were detected by a tip — more than twice therate of any other detection method. Employees accounted for nearly half of all tips that led to thediscovery of fraud. Organizations with fraud reporting hotlines are much more likely to catchfraud by a tip. These organizations also experienced frauds that were 41 percent less costly, andthey detected frauds 50 percent more quickly.

Although no system of internal control can provide absolute protection against fraud, you canimplement a system that removes the opportunity to commit fraud and encourages employees todo the right thing by reporting suspicious activity. 

Additional ResourcesThe AICPA Not­for­Profit Section offers a number of resources to assist NFPs with fraudprevention, ethics programs and internal controls. 

 (Word) (Word) 

 (PDF)Segregation of Duties Reference Charts for Small NFPs      (PDF)      (PDF)      (PDF) 

CPE­eligible on­demand courses (20% off for Section members)          

In addition, Section members receive a   off Ethical Advocate's ethics hotlineservice. The hotline is available 24/7/365, online and by phone. Services include online reportmanagement for report tracking and anonymous reporter and administrator communication.  

 This symbol identifies tools and resources available exclusively for Not­for­Profit Sectionmembers. When accessing premium member­only content within the Not­for­Profit ResourceLibrary, you will be prompted to enter your user ID and password to validate your Not­for­ProfitSection membership. Not a member? Learn more about these premium resources along with themany other benefits of membership in the AICPA   area.

Report to the Nationson Occupational Fraud and Abuse

Example Whistleblower PolicyExample Conflict of Interest PolicyNot­for­Profit Reputation Risk Management

Organizations with 4+ employeesOrganizations with 3 employees Organizations with 2 employees 

Fraud Overview and Prevention for Not­for­ProfitsEthical Issues in Not­for­Profits

10% discount

Not­for­Profit Section Membership

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American Institute of CPAs® Not-for-Profit Section

Segregation of Duties – Two people

*Non accounting personnel such as a receptionist, administrative personnel etc can be trained to perform some of the less

technical duties.

Mail checks

Write checks

Reconcile bank statement

Record credit/debits

Approve payroll

Disburse petty cash

Authorize purchase orders

Authorize check requests

Authorize invoices for

payment

Receive and open bank

statements

Sign checks

Make deposits

Perform interbank transfers

Distribute pay checks

Review petty cash

Review bank reconciliations

Approve vendor invoices

Perform analytical procedures

Sign important contracts

Make compensation adjustments

Discuss matters with board or

audit committee

Review wire/ACH transactions

Review account activity

Accountant or other professional staff* Executive Director

Copyright 2016 AICPA

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American Institute of CPAs® Not-for-Profit Section

Segregation of Duties – Three people

*Non accounting personnel such as a receptionist, administrative personnel etc can be trained to perform some of the less

technical duties.

Write checks

Reconcile bank statement

Record credit/debits

Reconcile petty cash

Distribute payroll

Sign checks

Sign important contracts

Make compensation adjustments

Sign checks

Complete deposit slips

Perform interbank transfers

Perform analytical procedures

Review bank reconciliation

Review wire/ACH transaction

Review account activity

Approve payroll

Process vendor invoices

Mail checks

Perform analytical procedures

Approve invoices for payment

Disburse petty cash

Open mail and log cash

Receive bank statements

Accounting Staff

Accountant / other*

Executive Director

Copyright 2016 AICPA

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The Atlanta Community ToolBank, Inc. is a 501(c)3 nonprofit organization, Federal Tax ID# 58-2363433

410 Englewood AVE SE Atlanta GA 30315 404/254-0938

www.atlanta.toolbank.org

Acknowledgment of non-cash Charitable contribution

If you’d like this form to edit in Word, please request from TBUSA.

Name of contributing company or individual ToolBank staff person name

Street Address ToolBank staff person signature

City / state / zip Date of donation

Email address Other notes

Qty Description of property

contributed Value

(donor use)

Qty Description of property

contributed Value

(donor use)

This form is intended to facilitate compliance with Internal Revenue Code section 170 (f)(8) “Substantiation Requirement for Certain Contribution,” applicable to charitable contributions made on or after January 1, 1994. ToolBank staff cannot provide estimates of donation value to the donor. Donor is wholly responsible for obtaining reasonable valuation for their donation and for the accurate usage and filing of obtained valuations. The donor will be provided with a copy of this form at the time of donation;

the original document is the legal property of the Atlanta Community ToolBank.

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The Atlanta Community ToolBank, Inc. is a 501(c)3 nonprofit organization, Federal Tax ID# 58-2363433

410 Englewood AVE SE Atlanta GA 30315 404/254-0938

www.atlanta.toolbank.org

Policy on Corporate In-Kind Donations

The programs of the Atlanta Community ToolBank are reliant on in-kind (product) donations from for-profit corporations. The following policy has been developed to protect the interests of both our corporate donors as well as the ToolBank.

Tool donations The ToolBank gladly accepts donations of most tools and tool-related items (containers, tool boxes, organizational items). Tools and tool-related donations are, to the extent feasible, incorporated into the available tool inventory at the ToolBank. Tool donations are the primary in-kind resource that allows the ToolBank to increase its capacity to equip more volunteers. Tools and tool-related items that do not enter into the available tool inventory are stored until November, at which time they are sold to the public, in a garage sale-style event known as the Great ToolBank Tool Rush. Through the sale of donated tools and tool-related items, the ToolBank performs these critical functions:

1. Purges non-programmatic donations from the warehouse, allowing for an annual optimization of the facility;

2. Raises money, which is used to support program expenses and purchase tools that more closely match the available tool inventory;

3. Increases public awareness about the ToolBank throughout metro Atlanta.

Material donations All non-tool donations are considered material donations, which can loosely be defined as building materials. These items are made available through the Rescue & Reuse program, and will never enter the public marketplace as long as they are within ToolBank possession. The ToolBank commonly collaborates with national nonprofit organizations that route material donations to other nonprofits throughout the United States. Material donations are not liquidated in the Great ToolBank Tool Rush in the same fashion as tools (see above). If you have any questions about this policy, please do not hesitate to contact ToolBank Executive Director at any time at (404) 880-0054 x33 or [email protected]. Thank you.

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Governance & Management

Copyright © 2015. AICPA Inc. All rights Reserved. Permission is granted to download the tools and tailor or customize for internal use.

Whistle-Blower Policy

Purpose of this Tool

A whistle-blower policy creates a mechanism whereby, if an employee or volunteer becomes aware of a violation of policy or law, this can be reported without fear of retaliation. Not-for-profit entities (NFPs) can protect the organization and ensure that directors, employees and volunteers are aware of the policy and understand how to report concerns. This tool contains sample elements that can be used in the creation of a whistle-blower policy. As with any policy of this nature, the NFP may wish to consult legal counsel for assistance in developing a whistle-blower policy that is appropriate for the organization.

General

The Organization Code of Conduct (the code) requires directors, key volunteers, and employees to observe high standards of

business and personal ethics in the conduct of their duties and responsibilities. Employees and representatives of the organization

must practice honesty and integrity in fulfilling their responsibilities and comply with all applicable laws and regulations.

The objectives of the Whistle-Blower Policy are to establish policies and procedures for the following:

The submission of concerns regarding questionable accounting or audit matters by employees, directors, officers,

volunteers, and other stakeholders of the organization, on a confidential and anonymous basis

The receipt, retention, and treatment of complaints received by the organization regarding accounting, internal controls,

or auditing matters

The protection of directors, volunteers, and employees reporting concerns from retaliatory actions

Reporting Responsibility

Each director, volunteer, and employee of Organization has an obligation to report in accordance with this whistle-blower policy

(a) questionable or improper accounting or auditing matters, and (b) violations and suspected violations of Organization’s code

(concerns).

Acting in Good Faith

Anyone reporting a concern must act in good faith and have reasonable grounds for believing the information disclosed indicates

an improper accounting or auditing practice, or a violation of the code. The act of making allegations that prove to be

unsubstantiated, and that prove to have been made maliciously, recklessly, or with the foreknowledge that the allegations are

false, will be viewed as a serious disciplinary offense. It may also result in discipline, up to and including dismissal from the

volunteer position or termination of employment. Such conduct may also give rise to other actions, including civil lawsuits.

Confidentiality

Reports of concerns, and investigation pertaining thereto, shall be kept confidential to the extent possible, consistent with the

need to conduct an adequate investigation.

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Copyright © 2015. AICPA Inc. All rights Reserved. Permission is granted to download the tools and tailor or customize for internal use.

Disclosure of reports of concerns to individuals not involved in the investigation will be viewed as a serious disciplinary offense

and may result in discipline, up to and including termination of employment. Such conduct may also give rise to other actions,

including civil lawsuits.

Authority of Audit Committee

All reported concerns will be forwarded to the audit committee in accordance with the procedures set forth herein. The audit

committee shall be responsible for investigating and making appropriate recommendations to the board of directors, with respect

to all reported concerns.

No Retaliation

This whistle-blower policy is intended to encourage and enable directors, volunteers, and employees to raise concerns within the

organization for investigation and appropriate action. With this goal in mind, no director, volunteer, or employee who, in good

faith, reports a concern shall be subject to retaliation or, in the case of an employee, adverse employment consequences.

Moreover, a volunteer or employee who retaliates against someone who has reported a concern in good faith is subject to

discipline up to and including dismissal from the volunteer position or termination of employment.

Reporting Concerns

Encouragement of Reporting

The organization encourages complaints, reports, or inquiries about illegal practices or serious violations of the code, including

illegal or improper conduct by the organization itself, by its leadership, or by others on its behalf. Appropriate subjects to raise

under this policy would include financial improprieties, accounting or audit matters, ethical violations, or other similar illegal or

improper practices or policies. Other subjects on which the organization has existing complaint mechanisms should be addressed

under those mechanisms, such as raising matters of alleged discrimination or harassment through the organization’s human

resources channels, unless those channels are themselves implicated in the wrongdoing. This policy is not intended to provide a

means of appeal from outcomes in those other mechanisms.

Employees

Employees should first discuss their concern with their immediate supervisor. If, after speaking with his or her supervisor, the

individual continues to have reasonable grounds to believe the concern is valid, the individual should report the concern to the

director of human resources. However, if the individual is uncomfortable speaking with his or her supervisor, or the supervisor is

a subject of the concern, the individual should report his or her concern directly to the director of human resources or a level

above the supervisor. In addition, suspected fraud should be reported directly to the chair of the audit committee, who may be

contacted by phone at (Telephone Number), by e-mail at (e-mail address) or by regular mail at:

Mr. or Ms. Jenkins, Audit Committee Chair

[insert mailing address]

If the concern was reported verbally to the director of human resources, the reporting individual, with assistance from the director

of human resources, shall reduce the concern to writing. The director of human resources is required to promptly report the

concern to the chair of the audit committee, which has specific and exclusive responsibility to investigate all concerns. If the

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Copyright © 2015. AICPA Inc. All rights Reserved. Permission is granted to download the tools and tailor or customize for internal use.

director of human resources, for any reason, does not promptly forward the concern to the audit committee, the reporting

individual should directly report the concern to the chair of the audit committee. Concerns may also be submitted anonymously.

Such anonymous concerns should be in writing and sent directly to the chair of the audit committee.

Directors and Other Volunteers

Directors and other volunteers should submit concerns in writing directly to the chair of the audit committee.

Handling of Reported Violations

The audit committee shall address all reported concerns. The chair of the audit committee shall immediately notify the audit

committee, the president, the CEO, and chief operating officer of any such report. The chair of the audit committee will notify the

sender and acknowledge receipt of the concern within five business days, if possible. It will not be possible to acknowledge

receipt of anonymously submitted concerns.

All reports will be promptly investigated by the audit committee, and appropriate corrective action will be recommended to the

board of directors, if warranted by the investigation. In addition, action taken must include a conclusion or follow-up, or both,

with the complainant for complete closure of the concern.

The audit committee has the authority to retain outside legal counsel, accountants, private investigators, or any other resource

deemed necessary to conduct a full and complete investigation of the allegations.