Balance Sheet Management Practices by omd48029


Balance Sheet Management Practices document sample

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                           Presented by: Shelley Parnes

Internal Controls
Internal controls are systems of policies and procedures designed to promote and protect
sound financial management practices. Following internal accounting control procedures
will significantly increase the likelihood that:
     Assets of the organization are protected,
     Financial reporting is reliable, so that decision making can be facilitated,
     Compliance with laws and regulations are met,
     The organization’s policies are followed.

Key Elements of an effective internal accounting control system:
    Control environment
         o Board & senior management set the example and standard of
         o Senior Management is responsible for overseeing the day to day
             implementation of controls
         o Staff must understand the importance of controls
         o Appropriate hiring and retention practices
    Director and management involvement
    Control objectives
         o Authorization and recording of transactions
         o Access to assets
         o Asset accountability
    Organization structure and management controls
         o Clear lines of authority
         o Clear definition of responsibility
         o Authority commensurate with responsibilities
    Policy and procedures manuals
         o Written
         o Readily accessible
         o Clearly communicated
         o Updated regularly
    Segregation of duties
         o No one individual controls all aspects of processing a transaction
         o Small nonprofits often do not have sufficient personnel to achieve a
             traditional segregation of duties, in which case active involvement of
             directors and senior management in monitoring financial activities is
    Record-keeping and information systems
         o Record retention policy
         o Backup of computer data

           o Use of passwords
      Financial reporting system
      Budgets
      Periodic review of the control system
      Cost-benefit analysis

Trusting employees, board members and volunteers is not an element of internal controls!

Financial Reporting
    Objective: provide accurate, clear, concise reports that detail the financial activity
       and financial position of the organization to facilitate decision making and reduce
       the risk of misappropriation of funds.
    Comparing actual results to budget amounts will highlight deviations, permit a
       detailed follow-up of questioned amounts and reduce the likelihood of a large
       misappropriation of funds.
    Reports should be prepared monthly for management/staff review
    The Statement of Financial Position (aka Balance Sheet) and Statement of
       Activities (aka Income Statement) that compares Actual to Budget should be
       provided to all board members at least quarterly, preferably monthly.
       Commentary should be provided by the board treasurer to help board members
       understand the statements. Board members should be given the complete
       financial statements, not just a summary or highlights.

Cash Receipts
    Objective: Ensure that all cash intended for the organization is received, promptly
      deposited, properly recorded, reconciled and kept under adequate security.
    Cash receiving, processing, recording and bank reconciliation functions should
      not be preformed by one single person.
    Two people should be assigned the function of jointly controlling receipts and
      preparing a record of amounts received.
    Checks should be restrictively endorsed (for example: “for deposit only, ABC
      organization, First National Bank, account # 123456789) immediately upon
    Checks and deposit slip should be copied before they are deposited
    Cash should be deposited in the bank account intact, and on a timely basis, by a
      person independent of receiving and recording it in the accounting records.
    The deposit receipt should be compared to the initial cash record and the amount
      recorded in the accounting records
    If donor data base software is used, the amount of receipts recorded there should
      be reconciled to the amount recorded in the accounting software
    Bank reconciliations should be prepared by a person independent of the cash
      receiving, processing and recording function.
    All funds that are not deposited should be kept in a secure, locked area
    Consider the use of a bank lock box
    Consider the use of a bank scanner to deposit checks

      For cash receipts received outside of the mail, such as special events or door-to-
       door solicitation, pre-numbered, duplicate receipts should be used.
      Prompt and thorough investigation of donors who have noted that they did not
       receive an acknowledgement of a donation (such as a thank you letter or listing in
       an annual report) by a person independent of the person receiving and recording
       the contribution
      Consider bonding all employees who handle cash and checks

Restricted Gifts, Grants and Contracts
    Objective: Ensure that all restricted gifts, grants and contracts are received and
        properly recorded, and that compliance with the terms of any related restrictions
        and obligations are adequately recorded and monitored
    Documentation detailing restrictions and obligations (such as grant application
        and award letters) should be maintained. All restrictions and obligations should
        be communicated to the person recording these transactions in the accounting
    Expenses related to restrictions and obligations should be clearly recorded as such
        in the accounting records
    Reports showing the status of revenues and expenses relating to restricted gifts,
        grants and contracts should be reviewed periodically by appropriate personnel

Cash Disbursements
    Objective: Ensure that cash is disbursed only upon proper authorization of
      management, for valid purposes, and that all disbursements are properly recorded.
    Authorization, processing, check signing, recording and bank reconciliation
      functions should not be performed by one single person.
    People authorized to approve expenditures should be clearly identified.
    All expenditures should be approved in advance by authorized people
    There should be appropriate documentation indicating approval for payment
      retained for all disbursements
    Expense reimbursements should have appropriate receipts attached with the
      purpose of the expenditure noted on it
    All vendor bills and expense reimbursements should be checked for mathematical
      accuracy and reasonableness before they are paid
    Advance payments to vendors and employees should be recorded as receivables
      and controlled in a manner that assures that they will be offset against vendor bills
      or expense reports
    Employees should be required to submit expense reports on a timely basis
    Documents supporting expenditures should be clearly marked paid with the check
      number and check date or be attached to a check stub
    All disbursements, except petty cash, should be made with pre-numbered checks
    Signing blank checks in advance should be prohibited

   Check signing authority should be determined by the board. Usually at least three
    people have check signing authority to cover for absences. Larger checks should
    require more than one signature or the signature of a higher level authority
   The checks signer should review the documentation related to the expenditure for
    proper approval and general propriety before signing the check
   When there are changes in who can sign checks, the signature cards at the bank
    should be updated as soon as possible
   Unbudgeted expenditures over a certain amount should require board or executive
    committee approval. Also large purchases, such as fixed asset purchases should
    require board approval
   Unopened bank statements with cancelled checks (or copies thereof) should be
    received by a person independent of expenditure authorization, check processing
    and check signing functions. This person should at a minimum review the bank
    statement and the cancelled checks and preferably perform the bank reconciliation
   All blank checks should be kept in a secure, locked area
   All voided checks should be preserved and filed after being clearly marked as
    being void and with the signature area removed
   No checks should be made payable to Cash
   All signed checks should be mailed promptly
   All unpaid vendor bills and reimbursement requests should be kept in an unpaid
    invoice file
   1099’s should be issued on a timely basis for all required payments
   Petty cash:
        o Limit the amount that can be reimbursed by the petty cash
        o Require supporting documentation for all petty cash disbursements
        o Limit access to petty cash to one person who is the fund custodian
        o Keep petty cash in a locked, secured area
        o Have unannounced counts of petty cash made by someone other than the
            fund custodian
   Credit cards and debit cards
        o Credit cards are a much better option than debit cards
        o Insure that appropriate credit limits are in place
        o If you must use a debit card, consider using a separate checking account
            for debit card activity
        o Limit the number of people authorized to use the card
        o When an authorized card user is no longer employed, notify the card
            company immediately to remove the user
        o Review statements immediately upon receipt (or view on-line between
            statements) and notify the card company immediately if there is
            unauthorized use of the card
        o Unopened credit card statements should be received and reviewed by a
            person who is not authorized to use the card. If possible, this person
            should perform the statement reconciliation function

    Objective: Ensure that payroll disbursements are made only upon proper
       authorization to bona fide employees, that payroll disbursements are properly
       recorded and that related legal requirements (such as payroll tax deposits and
       returns) are complied with.
    Policies and procedures approved by the board should exist for vacations,
       holidays, sick leave, comp time, benefits, severance pay, and other personnel
    Personnel authorization, payroll preparation and approval, payroll check
       distribution, record-keeping and bank reconciliation functions should be clearly
    Background and reference checks should be performed on all employees
    Changes in salaries, wage rates, and payroll deductions should be properly
       documented and authorized.
    Changes in employment status should be recorded in employee personnel files
       maintained by a person independent of the payroll processing function.
    Time sheets containing supervisor’s approval should be used and retained for
       hourly employees
    Payroll registers should be reviewed and initialed by an appropriate authority
    Outsourcing the preparation of payroll checks/direct deposit, depositing of payroll
       taxes and filing of payroll tax returns is strongly recommended. Use an
       established, reputable national or regional firm - ascertain the firm has the depth
       of staff, appropriate computer systems, and funding
    Workers should be appropriately classified as employees vs independent
       contractors and as exempt employees vs nonexempt employees

Annual Financial Statement Audit
    An audit is a process for testing the accuracy and completeness of information
      presented in an organization's financial statements. This testing process enables an
      independent certified public accountant (CPA) to issue what is referred to as an
      opinion on how fairly the agency's financial statements represent its financial
      position and whether they comply with generally accepted accounting principles
    In Georgia, nonprofits that are required to register with the Secretary of State to
      solicit contributions and have received more than $1,000,000 in the prior year
      must file with the Secretary of State an annual financial statement certified by a
      CPA (note: if more than $500,000 is received, a financial statement review is
    Factors to consider in choosing a CPA:
          o Experience auditing nonprofits
          o Who will be performing the field work
          o Timing of the audit
          o References from the firm’s clients
          o The firm’s peer review report

           o CPA should not perform any management functions or be involved in any
              activity that they might later be required to audit.
           o Fees
      The CPA should be a resource for assistance with concerns about financial and
       other matters that arise during the year.

Board of Directors – Financial Management Issues
    May be done by the finance committee, executive committee or the audit
    This committee should be made up of independent directors and should include at
       least one person who has expertise in accounting.
    Selection and review of the independent external auditors
    Review with the independent external auditors the organization’s annual financial
       statements. Also, review with them the audit fieldwork process and all journal
       entries proposed by the auditors.
    Review and evaluate the management letter received from the independent
       external auditors.
    Review the IRS form 990 before it is mailed
    Review the organization’s internal controls
    Consider (especially for small organizations) having the treasurer or other board
           o Receive bank statements (including cancelled checks or copies of such
               checks) directly from the bank
           o Receive credit card statements directly from the card company
           o Review ED/CEO expense reports
    Other duties may include:
           o Ensure that federal and state filings are filed timely
           o Periodically review insurance coverage
           o Review the conflict of interest, ethics and related party policies
           o Monitor legal matters that could impact finances

IRS Form 990
    All board members should receive a copy of the Form 990 and be given an
      opportunity to comment on it before it is mailed to the IRS
    There should be a written conflict of interest policy. Directors and senior
      management should be required to disclose annually interests that could give rise
      to conflicts. The organization should regularly monitor the policy.
    There should be a written whistleblower policy
    There should be a written document retention and destruction policy
    There should be a formal process for determining the compensation of the
      ED/CEO and other senior management


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