Why Internal Controls? 3 Key Benefits

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From preventing fraud to being audit-ready, internal controls limit who accesses your organization’s financials and keep your nonprofit compliant with laws and regulations.

Internal controls prevent fraud and ensure the integrity of financial data by segregating duties, requiring transaction authorization, and accommodating a regular review of financial processes.

When it comes to preventing fraud, here’s how internal controls work:

Separation of duties: This reduces the odds of errors and the risk of fraud by limiting employees’ access to your organization’s finances. Instead of every employee having access to your finances, internal controls divide accounting processes and tasks for bookkeeping, deposits, and authorizations—your organization controls who can access what information.

Authorization: After duties are established, internal controls create an audit log. This log documents any changes made by any user and the workstation where they have made the changes. If fraud is suspected, it’ll be easily traceable to the audit log.

Audit-ready: Not having internal controls is a key reason nonprofits fail audits. Internal controls demonstrate an organization is a good steward of public funds and keeps an organization audit compliant.

If your organization isn’t using internal controls, it’s missing key benefits internal controls provide.

Internal Control Benefits

1. Financial Reporting

Internal controls minimize errors and prevent intentional misstatements in financial records. Auditors note if your organization is using internal controls and assess your organization’s financial statements.

Proper internal control activities can ensure timely, accurate financial reporting in your organization. Financial reports provide valuable analysis and insights, ensure your organization remains compliant, and show your organization’s economic position and performance.

Your financial statements should include information on your organization’s assets, equity, liabilities, and how your organization spent its revenue.

The benefits of financial reports include the following:

• Illustrating what sets your organization apart from others
• Hold staff members accountable for their performances and actions
• Provide actionable and specific insights into your organization that will help you operate more efficiently
• Identifies trends in your finances so you can make better decisions for your organization
• Provide insights into revenue recognition and whether you’ve correctly recorded your revenue, which is essential for financial reporting and taxation purposes

2. Compliance

Internal control compliance can mitigate risks and give your organization a greater chance of reaching its objectives. Well-designed key internal controls can keep your organization operating effectively and efficiently while complying with regulations.

Accounting compliance standards are policies and rules that help organizations maintain accuracy and ensure security. You go through an audit to ensure your organization complies with rules and regulations. You may review the following during a compliance audit:

• Payroll
• Data security
• Financial records
• Management standards
• Health and safety policies

Upholding accounting standards and complying with financial regulations is crucial. These tips help nonprofits prevent compliance risks in accounting:

Address issues: Issues can sometimes arise if staff members are unfamiliar with a procedure, or a glitch occurs in a system. Put a plan in place to address any problems and keep your organization in compliance. Ensure your plan includes any necessary training and disciplinary action.

Get audit-ready: You want to be prepared for every audit. Regular internal audits will keep you up to date on where your organization stands and let you correct any issues before an external audit occurs.

This guide covers the fundamental steps for audit preparation.

Review the standards: If you’re going to comply with standards, you need to understand what they are. Review applicable standards and keep up to date with your industry’s regulations.

3. Operational Effectiveness and Efficiency

Internal controls also help your organization work smarter. According to the 2024 Nonprofit Trends Report, organizations seek ways to work more efficiently and leave behind inefficient digital tools. Forty-three percent of organizations used seven or more tools daily, limiting employee efficiency.

Improved effectiveness and efficiency can benefit your organization’s finance and accounting operations. Internal controls ensure employees don’t have to navigate through finances to accomplish their duties and help prevent manual entry-related errors. You can automate data entry by pulling finances into forms and reports, saving your team valuable time.

Embrace internal controls, increase nonprofit compliance, and increase team efficiency. Discover more benefits of internal controls or dive into the complete guide to audit preparation.