Every organization needs internal controls to safeguard its assets, assure its accounting data is accurate and reliable, promote operational efficiency and encourage compliance with its prescribed policies and procedures. The start of a new year is a good time to take a fresh look at these controls to see how they measure up.
A good internal control system consists of four elements.
- An authorization system that provides adequate accounting control over assets, liabilities, revenues and expenses;
- Sound, uniform operating procedures for all departments;
- Segregation of duties so no one person or department handles the complete accounting cycle for financial transactions; and
- Personnel recruitment policies that ensure that competent individuals are hired.
Here are some recommendations to help you maintain a good internal control system.
- Maintain a cash receipt log independent of the bookkeeper and reconcile it to the cash receipts.
- Restrictively endorse checks upon receipt.
- List all mail receipts when mail is opened.
- Prohibit the bookkeeper from cash handling, including petty cash and bank deposits.
- Issue duplicate, pre-numbered cash receipts for all cash and checks received that are more than a specific dollar limit established by the board.
- Reconcile copies of the pre-numbered cash receipts to the cash receipts journal and deposit slips.
- Retain copies of the deposit slips validated by the bank.
- Have two individuals count and verify all cash received from sales made without using a cash register (i.e., a food booth).
- Make all disbursements—except petty cash—by check or credit card.
- Support each check with an approved voucher, including a purchase order if applicable.
- Use a “paid” stamp to cancel supporting documentation or invoice after payment.
- Review and approve signing authority for vouchers and checks annually.
- Prohibit the bookkeeper or executive director from signing checks if they have the ability to make edits in the general ledger.
- Have separate individuals approve vouchers and sign checks.
- Have the board establish a maximum dollar limit for each authorized signer.
- Require two signatures for checks above a board-stipulated dollar amount.
- Limit access to supply of unused checks to authorized personnel.
- Require that all withdrawals over a certain threshold from, and transfers between, bank accounts are authorized by the board or finance committee.
- Appoint an individual authorized by the board to approve the executive director’s expense voucher.
- Require receipts for all petty cash disbursements.
- Have each petty cash fund in the custody of one person.
- Prohibit the bookkeeper from maintaining petty cash.
- Require that petty cash vouchers are submitted for reimbursement at least monthly.
- Have the board establish the number and dollar amount of petty cash funds.
- Prohibit employee IOUs in petty cash fund.
- Prohibit cashing personal checks with petty cash funds.
- Require that all time cards are signed by the employee and their supervisor.
- Ensure the supervisor signing time cards has a personal knowledge of the hours the employee worked.
- Line out, correct and have employee and supervisor initial all time card errors.
- Prohibit the use of correction fluid on time cards.
- Assign an individual independent of preparing payroll vouchers to receive and distribute paychecks and monitor direct deposits.
- Require that bank reconciliations are performed by those whose duties do not include cash receipts and disbursements or account posting functions. Have bank statements mailed directly to that person.
- Have executive director or treasurer review reconciliations monthly.
- Reconcile bank statement balances, checkbook and passbook balances and general ledger and cash balances monthly.
- Have all bank accounts established and closed by approval of the board.
- Require that general journal entries are reviewed and approved by the organization director.
- Present the balance sheet and statement of operations to the board for monthly review and approval.
- Include all activities and sponsored programs in the general ledger.
- Require board approval of all transfers from fund balances.
- Train an employee to serve as backup bookkeeper.
- Include all accounts in the general ledger—either actively or summarized—in financial reports presented to the board.
Generally, developing strong controls and maintaining a tight watch over your accounts can help you both prevent and catch fraud. It’s especially important to be mindful of these processes if or as they transition from paper to electronic. The professionals in our office can assess your processes and fraud risk and provide you with a comprehensive and personalized plan to mitigate that risk. Contact me today at firstname.lastname@example.org or 609-689-9700 for more information.