Nonprofit Accounting Basics

Five Easy Ways for CEOs to Monitor Internal Controls

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

One of the top priorities for a not-for-profit organization's (NFP's) Chief Executive Officer (CEO) is the proper stewardship of the NFP's assets. Stories of fraud, waste, and abuse in the business world are all too common, and unfortunately NFPs suffer from these same problems. Because overseeing an NFP's programmatic and mission functions can take most of a CEO's time, many busy CEOs struggle to fulfill their stewardship obligations while attending to their other, and seemingly more pressing, duties.

Before doing anything else, the CEO must ensure that the NFP has a competent accounting function, which can be staffed by the NFP's own employees or by an outsourced accounting services firm. In either case, without a competent and effective accounting team, the CEO will struggle to oversee and manage his or her organization's finances.

After concluding that the accounting team is capable of serving the NFP, the CEO should consider performing the following procedures on a periodic basis. These tasks allow the CEO to exercise oversight of the accountants and provide the CEO with a good sense of the inner workings of the NFP.

1. Read the Monthly Financial Statements

It is imperative that the CEO read and understand each of the NFP's monthly financial statements. The CEO does not need to be a finance expert for this to be an effective procedure. The operations of most NFPs are such that if something does not make sense on the financial statements, it likely means something is wrong.

2. Review the Monthly Bank and Investment Statements

A CEO can keep tabs on the accounting department by scanning the activity shown on the NFP's monthly bank and investment statements. In many cases, the CEO should be able to obtain online, read only, access to the accounts. By logging in at least once each month and looking at what is flowing through the accounts, a CEO can get a good sense of the overall activities of the NFP. Again, if anything does not look reasonable to the CEO, it is worth asking for clarification.

It is particularly important for the CEO to be able to see copies of the canceled disbursement checks clearing through the accounts. Since banks have stopped returning copies of the canceled checks with bank statements, the CEO's online access should be set up such that the CEO can review the details of any canceled checks he or she wishes to see. (Banks may charge a fee for this service, but this is a service worth having.)

It is important to remember that this review is not intended for the CEO to examine the details of every transaction appearing on the cash or investment accounts. Rather, the idea is for the accounting department to be aware that someone else has the ability to randomly review and question cash transactions.

3. Periodically Review the Payroll Reports

Just as CEOs should review the bank and investment accounts, the CEO should also have online, read only access to the NFP's payroll reports. At least once each quarter, the CEO should take a look at the year-to-date wages listed for each employee. If the CEO does not recognize a name on the report, or if the wages look unreasonable, he or she should begin asking questions.

4. Consider Credit Card Usage and Expense Reports

If the NFP utilizes corporate credit, purchase, or travel & entertainment (T&E) cards, the CEO should have the ability to review the monthly statements. Again, the idea is for the CEO to take note of, and question, transactions that look to be improper. (The accounting and programmatic departments should still be responsible for the detailed review and approval of card charges.)

In addition, if the NFP utilizes software to track the approval of credit card charges and expense reports, it likely has the ability to run various reports detailing employee charges. The CEO should ask the accounting department to periodically run these reports. The CEO can then scan the reports to see whether any individual's credit card or expense report usage seems unusual.

5. Be Alert for Constituent Feedback

The accounting department provides services to both the NFP's members/constituents and internal staff. As such, these groups can provide the CEO with important feedback regarding the operations of the accounting department. No organizational department is perfect, but consistent or pervasive concerns raised by constituents or staff should be taken seriously and investigated. The CEO is in a unique position to receive feedback from both the accounting department's internal and external customers. If the CEO receives concerning information, it should not be ignored.

By regularly performing these five steps, the CEO should be able to efficiently maintain an appropriate level of engagement with an NFP's financial processes.

Remember, in the world of NFP finance, if something doesn't make sense, it's probably wrong!