Has Your Nonprofit Outgrown Its Financial Controls? 5 Signs to Watch
Your organization has grown.
But how do you know whether your financial controls have grown with it?
In the previous Pennies Count Insight, “Why the Controls That Worked Yesterday May Not Work Today: Growth Changes Risk,” we looked at how additional funding, employees, transactions, programs, and reporting requirements can change an organization's financial risk.
Recognizing that risk is the first step.
The next question is:
How do you know when your existing controls are no longer enough?
Here are five signs worth paying attention to.
1. The Same Individuals Control Too Many Financial Functions
If one person can initiate, approve, record, and reconcile transactions without meaningful independent oversight, the organization may have a segregation-of-duties weakness.
And this can happen unintentionally as an organization grows.
A process that made sense with three employees may create unnecessary risk with fifteen.
2. Financial Reports Are Produced but Rarely Questioned
Receiving financial statements isn't the same as providing financial oversight.
Boards and management should understand significant variances, unusual balances, restricted funds, cash concerns, and emerging financial risks.
A report that no one meaningfully reviews isn't much of a control.
3. Grant Reporting Requires Last-Minute Reconciliations
If your accounting team has to reconstruct financial information every time a grant report is due, the problem may be bigger than the grant report.
Your accounting processes should allow leadership to understand grant activity throughout the award period- not just when a report is due.
4. Your Financial Policies No Longer Reflect How You Actually Operate
Pull out your financial policies and compare them with what happens today.
Do the approval levels match?
Are the people identified in the policy still responsible for those functions?
Do the policies address your current accounting systems, payment methods, grants, purchasing processes, and organizational structure?
A policy doesn't provide much protection if the organization stopped following it years ago.
5. The Same Audit Findings Keep Coming Back
Recurring findings deserve particular attention.
Correcting an individual error may resolve the immediate problem.
But if the underlying process that allowed the error to occur hasn't changed, the same problem-or a different version of it- can and will return.
That's the difference between correcting an error and correcting a control weakness.
Internal Controls Should Evolve With the Organization
Effective internal controls aren't static.
They should change as your organization's operations, staffing, funding, technology, and financial risks change.
That doesn't necessarily mean hiring more people or creating complicated approval processes.
Sometimes it means adding an independent monthly reconciliation review.
Updating approval thresholds.
Restricting unnecessary system access.
Improving grant expenditure monitoring.
Creating better budget-to-actual reporting.
Or simply documenting who is responsible for what.
The goal isn't to make financial management more complicated.
It's to make financial oversight appropriate for the organization you are today, not the organization you were five years ago.
One Question for Your Next Board Meeting
At your next board or finance committee meeting, ask:
“Have our financial controls kept pace with our organization's growth?”
Don't answer it based solely on whether you've had fraud.
Don't answer it based solely on whether you've received a clean audit.
And don't answer it simply because financial statements are produced every month.
Look at how your organization actually operates today.
Because your organization may have changed significantly since those controls were designed.
And remember:
Growth changes risk.
Recognize Any of These Signs?
If one or more of these warning signs sound familiar, it doesn't necessarily mean something is wrong.
But it may mean something deserves a closer look.
Your nonprofit's financial controls should evolve as your organization grows and sometimes the first step is simply understanding where the gaps may be.
Find Out Where Your Controls May Need Attention
Take the complimentary Pennies Count Internal Controls Assessment to evaluate key areas of financial oversight and identify potential weaknesses that may deserve further review.
Take the Internal Controls Assessment →
Already know your organization needs a deeper look?
Pennies Count's Internal Controls Review provides a more comprehensive evaluation of one your organization's financial processes, controls, and oversight.
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Growth changes risk. Strong financial oversight changes with it.