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Internal Controls for Small Nonprofits: Accounting Software

best practices board finances fraud reporting Sep 21, 2023

Internal Controls for Small Nonprofits: Part 3, Accounting Software

     As nonprofit organizations, we have to be committed to protecting and stewarding our financial resources well. That does become more challenging when you only have a small staff or maybe one finance team member. That’s why I’ve created this five-part series to help you break down some of the key elements to protecting your nonprofit. Today we’ll examine the effective use of your accounting software.

     Utilizing accounting software is incredibly beneficial. It becomes kind of an internal control tool that can help you provide access to financial information. Accounting software really is critical to managing your finances even with a small team. Today, I want to share about how you can use it as an internal control tool.

1.   Set up permissions and access levels

     Most software products have this feature which allows for multiple users with different levels and permissions. You just have to go into the settings and set these permissions up. By doing this, you’re actually creating another opportunity for separation of duties. If you’re using Quickbooks, you may want to remove the ability of certain people to delete transactions. Maybe you need to limit the access in certain workflows or approval paths. This feature can help you maintain confidentiality and ensure that data is only managed and accessed by authorized people. 

2.  Automate your financial processes

     Software can help you automate some processes that would otherwise take a lot of time,  such as calculations, and even preparing financial reports. It’s important to develop those custom reports that help you keep an eye on those financial indicators that matter most in your nonprofit. For example, one program may have its revenue number up at the top in the revenues section of a report and an expense number down at the bottom in the expense section. While these two numbers are very much connected, the connection can be missed if the report doesn’t make it clear. Generating a report with revenues and expenses displayed by program can be far more actionable. Build your reports to clearly show the two connected items so you're really seeing profitability and trends, particularly related to revenue and expenses. 

    You can use your financial software to track your restricted funds and their associated net asset balances. (See how in my previous post How to TrackRestricted Funds in Quickbooks) You can also use your financial reports to develop what I call “stoplight reports.” (Learn more in my previous post Clear Traffic Lights: Uncovering Spending Trends with a Red Light and Green Light Report)  These budget reports take the guesswork out of crunching numbers. Overspent? Red light. Are we spending over our plan? Yellow light. Have we spent nothing? Green light. Those reports can also help you spot trends quickly. 

3.  Generate reports in real time

     Strong use of your financial software makes it useful and actionable in real time. We're not waiting until the end of the month to put in a bunch of transactions that have already happened. We are recording transactions as they happen and every report can be generated in real time to give relevant, current, and accurate information on the finances.

4.  Monitor expenses and budgets

     Next, we need to carefully monitor those expenses and

budgets.  When you're working with limited resources, you need to make sure you're keeping a close eye on how much you're spending. A “budget to actual” report will do the calculations for us. Many accounting softwares offer this as a feature. Once again, keeping finances in real time and running those reports will really help you to quickly identify if there's any discrepancies, so you can address them promptly.

     Closely monitoring your budget to actual report is also critical in detecting situations of fraud. The sad truth is that in most of the nonprofits that I've worked with that have experienced fraud, no one was looking at a budget to actual report! But, in order for fraud to happen, that transaction has to be recorded in the bank somewhere. Whether it's classified on the balance sheet in a fictitious account that's not being looked at, or it's coded to an account that no one's watching. Monitoring your budget progress is a really crucial way to ensure that transactions are appropriate and that there aren't discrepancies.


5.  Implement audit trails

     Finally, you should implement solid audit trails. The best accounting software options all create an audit trail. That means the software is dropping digital breadcrumbs at every step that you can always go back and trace. Sometimes as accountants, we hate it, because when we book an entry backwards, we have to correct it. But, let's say for fun that we book it backwards for the wrong amount, then we correct it, and then we still have to fix the amount. In this case, we’ll leave a mess of crumbs behind us. Nevertheless, the crumbs will always tell the story of what happened. Every entry is labeled with what caused it and what it's creating.

     Keep in mind, there's some accounting software out there (like Quickbooks) that doesn’t create solid audit trails because they allow users to change or delete transactions without leaving so much as a crumb. The good news is, in this example, QuickBooks does offer an “audit log” so you can at least use the software to look back at transactions and detect suspicious entries. You can find this Quickbooks feature by selecting the gear at the top right and then selecting “audit log.”  Once there, you can use the filters to refine your search and look at transactions that seem odd and unusual. 

     In conclusion, I know how important it is to protect your nonprofit from fraud. This is critical work and I hope that today's lesson provided some actionable steps to clear up some of the mysteries and make your accounting software a better tool to be used. This is lesson three in a five-part series on internal controls for small nonprofits. Click here to subscribe to my weekly tips and you’ll receive the next article in the series next week. 

     I also want to invite you to take my FREE Fraud Risk Assessment. It’s based on 12 key questions that I believe you should be asking yourself, and I’ve designed it specifically for nonprofit leaders just like you! 


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