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Internal Controls and Fraud Prevention in Non-Profit Organizations

Learn about the importance of internal controls in safeguarding assets, ensuring accuracy of financial records, and reducing the risk of fraud in non-profit organizations. Explore specific control objectives, elements of a control system, and best practices to minimize fraud risk.

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Internal Controls and Fraud Prevention in Non-Profit Organizations

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  1. Module 8 Internal Controls and Fraud Convery 2013

  2. Learning Objectives • Describe an Internal Controls System and its elements • Identify specific Internal Control issues in a NPO • Consider elements and strategies to reduce the risk of fraud Convery 2013

  3. Definition: System of Internal Controls • the set of policies and procedures designed to safeguard the assets of the organization and ensure the accuracy of financial records Convery 2013

  4. Adequate internal controls are necessary to ensure: • The data are reliable (for both administrators and oversight agencies) • Assets are safeguarded (from loss or theft) • The organization operates efficiently (without waste) • Policies are adhered to (so program goals are met) • Reports to oversight bodies have been made (to comply with laws and regulations) Convery 2013

  5. Specific Internal Control Objectives 1. Validity -- recorded transactions are valid 2. Authorization -- transactions are properly authorized 3. Completeness -- existing transactions are recorded 4. Valuation -- transactions are properly valued 5. Classification -- transactions are properly classified 6. Timing -- transactions are recorded at the proper time 7. Posting and Summarization -- transactions are properly included in subsidiary records, and correctly summarized Convery 2013

  6. Elements of Internal Control Systems 1. Competent, trustworthy personnel with clear lines of authority and responsibility 2. Adequate segregation of duties: • separate the custody of assets from accounting for them • separate authorization of transactions from custody of related assets • separate duties within the accounting function • separate operational responsibility from record-keeping responsibility 3. Proper procedures for authorization 4. Adequate documents and records 5. Physical control over assets and records 6. Independent checks on performance Convery 2013

  7. Selected Questions in an Internal Control Review • Have the bank accounts been reconciled each month? • Is a computerized accounting system in place providing reliable information to make timely decisions? • Have you filed the proper reports with the State, Federal government, and other oversight bodies on time? Is there a list of those reports and due dates? • Have the actual revenues and expenditures been compared to the budget with variances calculated and analyzed? • Is there proper documentation for the expenditures that have been made (e.g., approvals and invoices)? • How many people are on the payroll? Have the proper forms been filed with appropriate authorities? • What capital items have been purchased? • Does the Board receive a Treasurer’s report each month? • Do you have adequate insurance? • Have you engaged a CPA to perform an external audit for this fiscal year? Convery 2013

  8. Segments or Cycles The elements of internal control should be evaluated separately for each of these cycles: • Revenue and Collection Cycle • Payroll and Personnel Cycle • Purchasing and Payment Cycle • Inventory and Warehousing Cycle • Capital Acquisition and Repayment Cycle Convery 2013

  9. Quick Internal Controls Self-Assessment • Are two signatures required on each check? • Does the CEO receive the bank statements directly? • Are accounting personnel prohibited from signing checks? • Are checks received in the mail endorsed immediately? • Do you correct any internal weaknesses the CPA points out? • Are employees bonded? • Do employees take regular vacations? • Are unused checks under lock? • Is the computer system effectively backed-up? • Are policies and procedures written down and periodically reviewed? • Is there a reasonable document retention policy? Convery 2013

  10. Fraud • Most fraud is committed by a person within the company “above suspicion” • “Collusion” between two people makes fraud difficult to detect • Checking past employment references for new employees can help minimize risk Convery 2013

  11. Best practices • Get the facts through investigation • Get advice from an attorney and/or CPA • When terminating employees, get their keys, credit cards, access to computer, and then escort them out of the building • Change the locks and computer passwords • Contact your insurance company • Re-evaluate the system of internal controls and correct any deficiencies Convery 2013

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