Internal controls help NGOs handle everyday risks of mistakes, confusion, or fraud. They also protect staff from any pressure to misuse funds and from the suspicion of wrong-doing.
Internal controls are designed to ensure:
- Safeguarding of assets
- Prevention and detection of fraud or error
- Accounting records are accurate, complete and up-to-date
- Compliance with relevant laws and restrictions
- Employees are protected – from themselves and each other
There are two important aspects of an internal control system: the control environment, and the control procedures that take place within that environment.
The control environment includes the management style, organizational values, and culture.
Do management lead by example?
Is recruitment done fairly, or is there nepotism?
Is priority given to induction, training, and internal audit?
Are procedures written down and shared?
You can have the best designed control procedures in the world, but in a poor control environment they simply won’t be effective.
Nearly all internal control procedures fall into one of seven categories:
- Physical verification – cash counts, asset verification and stock counts
- Limited access – locks, passwords, and bank signatories
- Standard documents – standard formats for receipts, payment vouchers, requisitions, local purchase orders, travel allowance sign sheet, etc
- Segregation of duties – making sure not one person can carry out a transaction from beginning to end, no self-review or self authorization. We see this in action in a Procurement process.
- Checks and balances – Balancing the manual cashbook, double-entry controls over accounting records, reviewing the bank reconciliation
- Approval and authorization – budget holders approval of payments, Board authorization for asset disposal, etc
- Reconciliation – Comparing bank statement and cashbook, agreeing a statement from a supplier to your own records
Remember the building blocks
Think back to the building blocks of effective financial management at the start of this section. Internal controls are one building block, but the others also act as controls.
Checking the budget before making payments is an important control overspending
Transparent bookkeeping is an important control against fraud
Reviewing financial reports is an important control to detect errors and inconsistencies
Like all organizations, NGOs also face the risk of fraud. Prevention is better than cure! But if you detect it, be sure to act!