There are many ways that fraud or misuse of funds can happen in non-profits and charities and I will share some of the red flags I have come across, over my decades of being a non-profit executive and consultant.
Managing Your Bookkeeper
Managing your bookkeeper is a daunting task if you have little understanding of the work they do. This is not an unusual situation, I see many fine leaders who are baffled by accounting jargon. How do you oversee the accounting tasks and prevent the horrors of missing or misused funds? Financial policies would be a big step. Learning about the rules in accounting and how to read financial statements is another important step. This is core to making management decisions. Furthermore you have an obligation under non-profit and charitable operations to ensure that your books and records are kept to a standard. How will you know if you are meeting that standard?
Separation of Duties
“Separation of Duties” is a term that auditors use, it means that there are more people involved in the processes. For example the person who issues the cheque, the person who signs the cheque and the person who does the bank reconciliation are not the same people. A well planned Separation of Duties process would ensure that it would take collusion in order to defraud or at least make it more difficult. However if you are a small organization it is difficult as perhaps there is only one staff running the organization.
Bank Reconciliation At the end of the process each month there is a bank reconciliation done. This reconciliation compares the transactions entered into the books of the organization, insuring they are the same as what goes through the bank. This is hugely important and central to ensuring your books and reports are correct. Someone of authority in your organization like a board member or executive director needs to sign off on these reports, reviewing all the cheques that have gone through the bank.
Reporting – I would say the most common Big Red Flag I see in organizations that are having financial issues are that the reporting to the board is inadequate, inaccurate, misleading or non-existent. When someone is trying to hide from incompetence or wrong doing they are not likely to produce reports. An organization cannot make decisions without proper reporting. The reports will often show that there is a problem.
Signing officers are an important part of the process and there should be two signatures on each cheque. Furthermore when the signors sign there should be a document attached to the cheques showing what it is for i.e. receipts, bills, timesheets etc. The signor should review these documents and ask questions.
These are a few tips on risk management around your hard earned revenues. Remember: if you have any of these problems or need a charity qualified bookkeeper let us know.