Financial Policies and Procedures: Protecting Your Organization's Financial Assets


Factsheet - ISSN 1198-712X   -   Copyright Queen's Printer for Ontario
Agdex#: 050
Publication Date: 08/01
Order#: 01-047
Last Reviewed: 08/01
History: Original Factsheet
Written by: Stuart Budd - Organization Development Specialist/OMAFRA

Table of Contents

  1. Introduction
  2. Why Do We Need Them?
  3. Signing Authority
  4. Regular Reporting
  5. Annual Budgets and Spending Limits
  6. Cash Transactions
  7. Cheques
  8. Credit and Debit Cards
  9. Committee/Division Accounts
  10. Independent Financial Reviews
  11. Use of Volunteers for Financial Review
  12. Retention of Records
  13. Written Policies
  14. Peace of Mind
  15. References

Introduction

The responsibility for managing and protecting the assets of any non-profit organization rests on the shoulders of the board of directors. In many rural non-profit organizations these directors may be "just volunteers". Despite this, the board needs to approach their financial affairs from a very business-like perspective! This Factsheet reviews basic policies and procedures that organizations should have in place to protect their financial assets. It does not cover issues like bonding and insurance, which are also important parts of an organization's risk management strategy.

Why Do We Need Them?

"We don't worry about financial procedures we trust our treasurer to look after the money!"

Some people may feel that implementing strict financial procedures is an insult to the integrity and honesty of their treasurer and others who manage the funds of the organization. In reality, procedures of this type are as much for the protection of these people as they are for the protection of the organization. Proper financial procedures help to take the entire burden off the shoulders of the treasurer and eliminate temptations for anyone involved in managing the assets of the organization.

Signing Authority

A standard safeguard in volunteer organizations is to require 2 authorized officers to sign all cheques. In many organizations 3 or 4 persons will be authorized to provide the 2 signatures so that if 1 person becomes ill or goes on an extended trip the organization always has at least 2 people to sign cheques.

This procedure is ineffective if 1 of the officers signs a quantity of blank checks in advance. While probably well intentioned, this person has abdicated their duty as an officer and director and has put the organization's funds at risk. Signing officers and the entire board should always insist on all cheques being completely filled in before anyone signs. Officers with signing authority may also want to verify the cheques against the corresponding invoices before signing.

Regular Reporting

The board should specify a regular schedule of financial reporting and the level of detail that they require in those reports. At a minimum, financial reports should indicate the current cash position of the organization, the inflows and outflows for the reporting period and any outstanding expenses or receipts. Provide copies of the report to all board members. It is the duty of the directors to ensure that they review and understand the financial reports provided.

The financial books or records of the organization are the property of the organization and not the treasurer. They should be open for examination at any reasonable time by directors of the organization.

Annual Budgets and Spending Limits

Spending authority for the signing officers is normally provided in the annual budget of the organization. In most organizations, the board of directors delegates authority to the signing officers for day to day purchases outlined in the budget. This means that the treasurer does not have to wait for approval at a board meeting every time a new pencil needs to be purchased (provided that pencils/office supplies are included in the budget).

Expenditures not included in the budget should be approved by motion at a meeting of the board.

The organization may set out spending limits for the officers on major purchases. Expenditures over a predetermined dollar level may require board approval. A sample board policy could state that "any purchases over $500 require approval by motion at a board meeting".

For larger expenditures or for capital expenditures, the organization may have a policy that requires a competitive bidding process. Written quotes from 2 or 3 vendors would be obtained and presented to the board before a purchase was approved.

Cash Transactions

Some activities of organizations may be most easily handled with cash. Sometimes this may result in large amounts of cash being handled at one time. Some simple procedures can limit the possibility of theft or any accusations of theft.

  • Have cash receipts counted and recorded as soon as possible from the time that they were received.
  • Always ensure that there are at least 2 people present when cash is being handled.
  • Once cash has been counted, lock it up in a location that can only be accessed by authorized individuals.
  • Make bank deposits regularly to avoid having significant amounts of cash on hand.
  • In cases where cash is being distributed, request receipts or have the individuals receiving the cash sign a form stating that they have received it.

Cheques

Cheques provide an easy to follow paper trail for organizations. One risk with cheques is the possibility of forgery. While this risk may be relatively small, the increasing popularity of automated teller machines (ATM's) and the accompanying trend toward less personal banking can make it more tempting for some individuals to attempt to pass forged cheques. The following actions can help reduce this risk.

  • Keep all blank cheques in a secure and preferably locked location.
  • Keep signed cancelled cheques that are returned from the bank in a secure and preferably locked location.

Credit and Debit Cards

Credit and debit cards are convenient and widely accepted and many organizations have decided that it is appropriate for their staff or officers to be issued a card for the organization. If this is the case, then the officers should meet with officials from their financial institution to discuss the options that can be put in place. These may include daily transaction limits and limits to specific classes of vendors. The persons who carry the cards need to have very clear guidelines around the use of these cards.

Organization credit cards should never be used for personal items even if the individual pays their share of the balance as soon as the statement comes due.

Committee/Division Accounts

Committees or divisions of an organization may have separate bank accounts and some may even have their own treasurer. The board of directors of the parent organization should be aware of these kinds of accounts and authorize the use of them. These accounts should be operated under the same principles as those of the parent organization, including any requirement for an annual independent financial review. Committees and divisions of incorporated organizations are a part of the corporation in the eyes of the law. Their money is the corporation's money. They enjoy the benefits of incorporation but they also share the accompanying responsibilities and accountability. This includes the responsibility to report to the board of directors and the membership an accurate account of the finances. The board will determine the frequency of this reporting, but reports should be presented at least once a year and should be made through the treasurer of the parent organization.

Independent Financial Reviews

Every organization should have their financial statements examined by an independent, objective and qualified person once a year. A financial review completed by a professional in the field will provide the organization with a credible opinion about the accuracy of the financial statements, how fairly the statements reflect the financial situation of the organization and the degree to which the organization has complied with generally accepted accounting principles. Any concerns about the financial health of the organization or the financial practices of the organization will be brought to the attention of the membership. This type of review provides the board with assurance that the assets of the organization are being managed properly and that the financial records and supporting documents are accurate and complete.

Organizations should review the legislation under which they are incorporated as well as their own constitution and bylaws for information about the type of financial review required. Organizations that have status as a registered charity may require a higher level of assurance. Granting institutions may also stipulate the level of financial review required before they will agree to provide funding.

The word "audit" is commonly used. An audit is precisely defined by the accounting profession and provides a very high level of assurance for an organization. Other services are available from accounting professionals, providing varying levels of assurance for the organization. These varying levels of assurance involve varying levels of work by the accounting firm. The price of these services will normally increase with the level of assurance provided.

An accountant can provide you with more information about their various services but here is a brief overview of some commonly provided services.

  • Audit – An "audit" includes the use of inspection, observation, enquiry, confirmation, computation, analysis and discussion to provide the highest level of assurance possible.
  • Review – A "review" includes the use of enquiry, analysis and discussion of information supplied by the organization to provide a moderate level of assurance. A review is less rigorous than an audit and does not provide the same level of assurance.
  • Compilation – In a "compilation", the accounting firm compiles financial statements for the organization from the books and records of the organization. The organization knows that the statements are accurate based on the information provided but have no assurance that the records have been verified as accurate. The term "Notice to Reader" is also used for this third level of assurance. In some cases a "Notice to Reader" may go beyond a compilation and provide a somewhat higher level of assurance.

Use of Volunteers For Financial Review

Small volunteer organizations may find the cost of accounting services to be expensive in comparison to their operating budgets. For groups that find themselves questioning the affordability of a professional examination of their financial records there are other options. In all cases, the board and the membership of the organization must be aware of and approve of the level of assurance that is being provided.

Some accounting professionals and firms may be willing to provide free or discounted services for non-profits in their communities. Is this a possibility in your community? Take a look at your membership list and see if there are any members who are practicing or retired accounting professionals. These people may be willing to contribute their time and talents. Do not use someone who is currently on the board as this can present a conflict of interest situation for the individual and the organization.

Some organizations will locate other volunteers who do not have credentials in the field of accounting but who have other relevant experiences (e.g. a bookkeeper, an experienced treasurer of another organization). This type of volunteer review is no replacement for the services of a professional accountant but it is certainly better than doing nothing and can provide small organizations with a modest level of assurance. If your organization decides to use volunteers, it is advisable to have 2 individuals working together.

As with any volunteer task, it is important to provide the individuals recruited with a clear job description that outlines the tasks to be completed. What records do you want them to examine and in what detail? What type of report is the organization expecting? When must the task be completed?

What level of financial review is right for us?

Recruit the highest level of financial expertise that your organization can afford and that can be justified based on the complexity of the organization's business. Discuss your situation and the options with a professional accountant and find out what the costs would be. Ensure that the board and the membership are aware of and comfortable with the level of assurance that is currently being provided. Review this every year! The more money that is passing through an organization's hands, the higher the risk and the greater the need for a high level of assurance.

Retention of Records

Organizations should have policies in place that clearly state the length of time that financial records of the organization must be kept. This will apply both to physical written records (ledgers, cheques, receipts, etc.) and to electronic records if the treasurer is using a computer program to manage the finances of the organization. Seven years is a commonly accepted length of time but choose the length of time for your organization based on the business of the organization.

Written Policies

Volunteer organizations normally experience a regular turnover of directors and officers. A written "Policies and Procedures" document is a useful guide for both new and experienced directors and will be especially helpful in years where a large percentage of the board is new. This document can also be used to clearly communicate with the membership if there are ever questions about how the board is dealing with the financial affairs of the organization.

Peace of Mind

Developing financial procedures can seem like a lot of work to prevent something that may never happen but view these procedures as a form of insurance for your organization. Remember that "It's too late to close the barn door after the horse has run away" or after some of the organizations assets have walked away! The missing funds may be just the tip of the iceberg, in terms of costs to the organization, when compared with time spent by the officers and directors, the emotional wear and tear on people most closely involved and the potential loss of credibility in the eyes of the community.

Take some time at your next board meeting to review the financial safeguards that your organization has in place!

References

Assurance Handbook, Canadian Institute of Chartered Accountants
Financial Resource Management For Nonprofit Organizations, L. Haller, 1982, Prentice-Hall Inc.
Meeting Today's Challenges, OMAFRA Workshop Manual, B. Carson, 1990
Strengthening Leadership Workbook Series, N. Draper, Family Space Quinte, 1997
The Not-for-profit Administrator newsletter, Cowperthwaite Mehta Chartered Accountants, http://187 gerrard.com


For more information:
Toll Free: 1-877-424-1300
E-mail: ag.info.omafra@ontario.ca