Internal controls, policies and procedures should be periodically reviewed to ensure they are up to date and are functioning as intended. However there are few underlying conditions, which lead to some of the problems often found in non-profits such as excessive fundraising expenses, executive salaries, high overhead or downright fraud. Limited resources, tight operating budgets, disengaged boards, weak fiscal controls, high personnel turnover, loose roles and responsibilities and lack of timely information are creating financial and operational constraints that can be lingering for a long time until the problem is really identified.
The financial reports, even when regularly and comprehensively done, are not necessarily self-explanatory. Nonprofit accounting rules for restricted funds add significant complexity. Red flags such as absent segregation of duties, missing bank /cash reconciliation, single signatures over disbursements without oversight, lack of management control are not visible in the financial reports as such.
The financial integrity of the nonprofits Starts at mission, values and objectives, Needs the right tone at the top board policies reflecting appropriate duty of care and Works when the appropriate procedures and systems provide for clear roles and responsibilities, including adequate segregation of duties and compensation aligned to motivation.
Experienced finance professionals know that
Yellow flags are on the income statement, Red flags are on the balance sheet.
Every nonprofit board would benefit for maintaining and reviewing the flags checklist on a regular basis.