Steps to Ensure Good Fiscal Oversight

In the world of nonprofits, schools have specific rules and regulations to which they must adhere. A school needs to provide information to its administrators and board of trustees; it must adopt good internal controls and administrative policies; and it must begin these practices when the school is small so that the best practices are in place and additional procedures added as the school grows.

The primary functions of a school’s audit and finance committee are to assist the school’s board in oversight of the school’s financial policies, including the development of its annual budget and long-term financial projections, the integrity of the school’s financial statements including the evaluation of the school’s system of internal controls over financial reporting, and the qualifications, independence and performance of the school’s independent auditors in conjunction with the annual audit. The audit and finance committee is involved in the selection of the independent auditors and review of the tax return.

The school needs to prepare a written document that expresses its procedures for effective risk management and internal controls to safeguard its assets. This manual should be developed by administration together with the audit/finance committee. The manual needs to be distributed to all financial and administrative employees to clearly describe their duties and responsibilities. There must be a segregation of duties implemented within the accounting and administrative departments to prevent theft, fraud and coercion. The document should be reviewed and updated on an annual basis.

Specific routines should be put in place for the financial operations and internal controls. Different people should be handling different financial areas. Control environment, risk assessment, control activities and monitoring are the key components to the process of internal control. Revenue should be tracked using numerical sequence of invoicing to control the completeness. Expenditures should be accounted for using an accounts payable system. Expenditures should be approved by department heads and compared with budgets approved by the board of directors. The employee who prepares the check should not be the person who signs the checks. Check payments should be prepared once a week and provided to the signatory with proper backup to substantiate the expenditure. Checks requested for immediate payment should be avoided to deter fraud. The employee who prepares the bank deposits and the check disbursements should not be the person who receives the mail and opens the bank statements.

The finance department should develop a monthly package to be prepared for review by management. The package should include the actual activity vs. the budget, bank reconciliations, bank statement, payroll registers, credit card statement, current balance sheet and income statement. It is recommended that financial reports be prepared directly from the accounting software and limit the amount of spreadsheets used outside the general ledger package. Each of the monthly reports should be kept in a binder to be accumulated for the year. If there are changes made to prior transactions, these can be researched back to the monthly packets.

The accounting staff needs to make sure that all documents are filed and stored securely. Electronically scanned documents should be saved and organized properly. Each employee should be assigned a username and password in a systematic way. No employees should be sharing usernames or passwords. This will assist management to know what work and transactions each employee is responsible for. This will also help management track if an employee is changing any previously reconciled transaction. Some accounting software packages allow an “audit” trail to be functioning. This will help if the school is encountering numerous changes to previously approved and reconciled transactions.

The school must develop a policy for usage of business credit cards by notifying employees of the limitations and type of expenditure that the card can be used for. The school must make sure that employees have been informed that personal expenses are forbidden to be charged on business credit cards.

The payroll department must make sure that complete files are kept securely for each and every employee. These are highly confidential records with the personal information of each employee. The files should clearly document the employee, salary, title, responsibilities, benefits and allowances. These files should be reviewed, evaluated and updated annually.

Schools are usually required to be audited on an annual basis. There are certain accounts that are selected to be tested during the audit procedures. If the school has obtained new financing or purchased new assets, it would be helpful that copies of those related documents be accumulated in a separate binder to prepare during the year for the audit. New contracts and financial commitments should also be kept here.

Schools have numerous opportunities to receive grants. Most of these grants are given for specific restricted purposes. The school should make sure that it can adhere to the requirements and stipulation within the grant document before it accepts the grant. It may be important that a grant director be hired to thoroughly evaluate the specifics of the grant document.

The Internal Revenue Service recommends that a nonprofit organization put certain policies in place. The board of directors should complete a written conflict of interest policy disclosing any direct or indirect connection with vendors, employees and clients. This should be signed off on an annual basis. A written whistleblower policy should be developed by the finance committee and distributed to all employees. The policy should describe the appropriate chain to report suspicious activity to. It should also be described that the whistleblower will be protected. Lastly, the school should have a written document retention and destruction policy. Documents should be kept for six years. Electronic files should be backed up daily and stored away from the main office in case of fire or theft.

In conclusion, the financial structure of the school is strongest if the governing board is effective and proactive in serving the school. They are the school’s unpaid hearts and souls.

Laura Matthews is a CPA at Matthews & Co, LLP in New York City. [email protected]