Control Activities – preventing or detecting and correcting what can go wrong so you can protect your nonprofit

By: Mark Robins and Casey Atalie Claveria

At a glance:

• The main takeaway: Establishing an effective system of internal controls is important in mitigating risk and avoiding preventable issues that may arise within a nonprofit organization.
• The impact on your business: Effective control activities not only prevent the misuse or misappropriation of assets but allow non-profit organizations to safeguard their assets, maintain donor trust and fulfill their mission.
• Next steps: Identify what could go wrong with your processes and procedures. Are there mitigating control activities? If not, design and implement specific activities that address the risk and what could go wrong.

The full story:

Control activities are specific activities implemented within an organization that prevent and detect the misuse and misappropriation of assets. They are intended to address what can go wrong. These activities encompass policies and procedures established to ensure that financial information is accurately recorded, processed and reported in compliance with relevant laws, regulations and organizational guidelines. For nonprofits, where transparency and accountability are extremely important, control activities play a crucial role in safeguarding assets, maintaining donor trust and fulfilling the organization’s objectives and mission.

Key Principles:

1. Segregation of Duties: Assigning different responsibilities to different individuals to reduce the risk of errors and fraud.
2. Authorization and Approval: Ensuring all transactions are properly authorized and approved by appropriate personnel.
3. Physical Controls: Safeguarding assets and resources through physical measures such as locks, security systems, and access controls.
4. Information Processing Controls: Implementing controls over the processing of information to ensure accuracy, completeness and validity.
5. Reconciliation and Review: Regularly reconciling accounts and conducting reviews to detect errors and discrepancies.
6. Performance Reviews: Evaluating performance against predetermined goals and objectives to ensure efficient use of resources.
7. Segregation of IT Duties: Separating duties within information technology systems to prevent unauthorized access and manipulation of data.
8. Policies and Procedures: Establishing clear policies and procedures to guide organizational activities and ensure consistency.

Benefits for Nonprofits:

1. Enhanced Accountability: Clear control activities help establish accountability within the organization, reducing the risk of mismanagement.
2. Improved Financial Reporting: Strong control activities contribute to accurate and reliable financial reporting, enhancing transparency and credibility.
3. Risk Mitigation: By identifying and addressing risks, nonprofits can minimize the likelihood of financial losses and reputational damage.
4. Efficiency and Effectiveness: Well-designed control activities promote efficiency and effectiveness in operations, ensuring resources are utilized optimally.
5. Compliance Assurance: Compliance with legal and regulatory requirements is facilitated through effective control activities, reducing the risk of penalties or sanctions.

Implementation Tips for Nonprofits:

1. Risk Assessment: Conduct a thorough risk assessment to identify areas of vulnerability and determine where control activities are most needed.
2. Clear Policies and Procedures: Develop and communicate clear policies and procedures outlining control activities to all staff members.
3. Training and Education: Provide training to employees on their roles and responsibilities within the control environment, including adherence to policies and procedures.
4. Monitoring and Evaluation: Regularly monitor and evaluate the effectiveness of control activities, adjusting as necessary to address changing circumstances or emerging risks.
5. Board Oversight: Ensure active oversight from the board of directors or governing body to promote a strong control environment and foster accountability.
6. Integration with Operations: Integrate control activities into day-to-day operations to embed a culture of control throughout the organization.
7. Continuous Improvement: Foster a culture of continuous improvement, encouraging feedback and innovation to enhance control activities over time.

By adhering to these principles and implementing effective control activities, nonprofits can strengthen their internal controls, safeguard assets and achieve their mission more effectively while maintaining public trust.

If you or someone at your organization needs help with establishing a system of internal controls, please reach out to Brett Williams at Aprio.

Related Resources:

Protect Your Organization with an Effective Control Environment

Be the Vigilant Guardian: The Monitoring Component of Internal Controls for Your Nonprofit

Bi-Annual Survey Reports on Occupational Fraud Statistics and the Success of Internal Controls, Among Many Other Findings