Controls key to transparency

By Teresa Loker

Establishing financial controls is fundamental to the success of any charitable organization. These controls serve as a framework for policies and procedures to assist the organization in achieving its goals, while ensuring its compliance with its fiduciary responsibilities.

The fundamental areas that must be addressed to implement these controls include:

  • Organizational structure
  • Job descriptions
  • Financial reporting
  • Budget controls.

Organizational structure
The first order of business must be to establish  an organizational structure that defines how financial decisions are made. In other words:

  • Do the organization’s bylaws identify who has authority to acquire property or incur debt on behalf of the organization?
  • Are these decisions made by the board of directors?
  • Do these decisions require congregational approval?

Whatever the case, prior to the organization making a significant financial decision, the proper authority — as identified in the organization’s bylaws — must provide its approval.

Additionally, the bylaws should identify which corporate officers can execute documents on behalf of the organization. Proper documentation of the decision-making process should be retained (such as board meeting minutes or notice of a congregational meeting) so evidence exists that the appropriate protocol was followed in accordance with the bylaws. Significant financial decisions that affect the organization should never be made without the proper authority’s approval.

Job descriptions
Job descriptions for all staff — particularly those handling the organization’s finances — are integral to implementing proper financial controls. Employees need to be aware of their specific roles and responsibilities so there’s no question as to who’s handling specific tasks.

Job descriptions are a tool for employers to hire individuals with the appropriate skill sets. They also serve to provide benchmarks so disciplinary action can be taken, if necessary. Job functions that are considered “high risk” should be appropriately identified and performed under a dual-control process to ensure checks and balances are in place. To reduce the risk of embezzlement, no single individual should be able to both approve and disburse funds.

Financial reporting
Segregation of duties is key to establishing financial controls so that the risk of error, intentional fraud and reputational risk are minimized. Procedures should be in place to periodically review the controls to make certain they’re adequate and operating effectively. It’s also a good idea to have an independent CPA firm complete an assessment of the controls to provide recommended changes or enhancements.

The key to an organization’s financial health is predicated, in part, by its ability to manage itself based on the accuracy of its financial records. Those records roll up to financial statements consisting of a balance sheet and income-and-expense statement, which should be reviewed by management on a timely and consistent basis.

To monitor financial performance, the financial statements should be carefully reviewed, as they’re representative of the organization’s financial health and are the basis for making key financial decisions — incurring debt or making capital expenditures, for example. Key indicators (liquidity, revenue and expense trends, debt levels and performance to budget) should be evaluated to confirm that adequate financial controls are in place.

These statements can also be used to help management identify areas that warrant attention, such as targeted expense cuts. Annually, the organization should engage an independent CPA firm to audit its financial statements to confirm their accuracy.

The audit may also serve to expose fraud or other inappropriate activities. If discrepancies are found, the organization’s board should immediately take action to ensure that the appropriate controls are put in place.

Budget controls
Prior to the beginning of every fiscal year, the organization should establish a budget of anticipated revenues and itemized expenses. This practice will provide management with a global view of the inflows and outflows of the organization. Each department head should be tasked with providing a comprehensive breakout of anticipated expenses for his or her area, including capital expenditures.

Once all of the information is consolidated, it will become apparent whether or not the organization needs to raise funds or reduce expenditures to achieve a break-even status so that cash reserves aren’t eroded.

Most important, performance to budget must be monitored on a monthly basis, once the budget is established. Department managers must be held accountable for performance to budget, as any variances may affect the overall organization. A defined process for approving expenditures should be implemented to ensure they’re necessary and authorized. As performance is tracked, it may be necessary to make adjustments along the way.

An organization’s ability to meet its goals directly correlates to how effectively it establishes and monitors its financial controls. A charitable organization must implement controls to foster an environment that promotes accountability and transparency, whether it’s establishing a set of bylaws to affect a collaborative decision-making process, creating job descriptions to establish accountability, or consistently monitoring financial performance.

Teresa Loker is senior vice president and credit manager in the religious institution division of San Francisco-based Bank of the West. She can be reached at


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