What internal financial controls are recommended?
What does the Sarbanes-Oxley Act have to do with it?
An independent audit is one form of internal financial control, but it’s important to put ongoing procedures into place as well. This helps to safeguard an organization’s assets and enhance reliability of its financial records. Internal controls are designed to provide assurance that transactions are properly authorized and recorded, accountability over assets is maintained, and access to assets is limited to authorized individuals.
In 2002, in response to corporate accounting scandals, the federal government passed the American Competitiveness and Corporate Accountability Act (more commonly known as the Sarbanes-Oxley Act). In brief, the Act compels corporate boards to monitor and be responsible for their companies’ financial transactions and auditing procedures. In other words, it regulates their financial controls.
Why does this matter to your nonprofit? The Act itself doesn’t apply to nonprofits, but there are a number of provisions that you might consider voluntarily adopting, particularly as they relate to board oversight and committees, disclosure, document retention and audits.
Another very important reason that this Act may be relevant to your nonprofit is that it inspired a number of state laws that do apply to nonprofits, such as the California Nonprofit Integrity Act of 2004 which addresses registration of a charity, financial reporting, auditing and other areas relevant to a nonprofit’s finances and management.
In addition to familiarizing yourself with applicable state laws, following are a few key areas you’ll want to consider as you develop your internal controls:
- Organizational budget, size and objectives
- Board and staff involvement in finances
- Establishment of audit and/or finance committees
- Organizational structure and governance
- Segregation of duties
- Recordkeeping and recording systems
- Authorization protocols
- Periodic board review
- Cost-benefit analysis (e.g., is the cost of the proposed system aligned with the benefits of implementation for your particular organization?)