Segregation of Duties for Cash Disbursements in Nonprofits

Effective cash disbursement processes are crucial for nonprofits to maintain financial integrity, transparency, and operational efficiency. Unlike for-profit organizations, nonprofits face unique challenges, including stringent regulatory requirements and the need to assure donors that funds are used appropriately. One critical internal control is the segregation of duties which ensures that no single individual has control over all aspects of any significant financial transaction. This article explores the importance of segregation of duties for cash disbursements in nonprofits and offers practical steps for implementing effective controls.

Understanding Cash Disbursement

Cash disbursement involves the outflow of funds from the organization to pay for expenses, liabilities, and other financial obligations. For nonprofits, this could include payments for program expenses, grants, salaries, office supplies, and other operational costs. A well-managed cash disbursement process ensures that funds are allocated and spent according to the organization’s mission and donor restrictions.

Key Functions in Cash Disbursements

The process of cash disbursements involves several key functions that should be segregated to maintain effective internal controls:

1. Authorization: Approving the expenditure.
2. Custody: Handling the actual cash or check.
3. Recording: Recording the transaction in the accounting system.
4. Reconciliation: Verifying the accuracy of financial records.

Implementing Segregation of Duties

To effectively segregate duties, nonprofits should consider the following practices:

1. Authorization: Ensure that only designated individuals, such as department heads or senior managers, have the authority to approve expenditures. Establish clear policies outlining who has the authority to approve disbursements and under what conditions. Approval thresholds should be set, requiring higher-level authorization for larger amounts.
2. Custody: Separate the handling of cash or checks from the authorization and recording functions. The individual responsible for issuing checks or managing cash should not have the authority to approve transactions or record them in the accounting system. Decide whether payments will be made via check, electronic funds transfer (EFT), or other methods. EFTs are often faster and more secure, reducing the risk of lost or stolen checks.
3. Recording: Assign a different individual to record transactions in the accounting system. This person should have no involvement in the authorization or custody of cash or checks.
4. Reconciliation: Regularly reconcile bank statements with accounting records. The reconciliation process should be conducted by someone who is not involved in either the authorization, custody, or recording of transactions. This independent review helps ensure that discrepancies are identified and investigated promptly.

Overcoming Challenges in Small Nonprofits

Implementing segregation of duties can be challenging for small nonprofits with limited staff. However, several strategies can help:

1. Board Involvement: Involve board members in the approval and reconciliation processes. For example, a board treasurer can review and approve expenditures and conduct periodic reconciliations.
2. Rotating Duties: Rotate financial responsibilities among staff members periodically to reduce the risk of fraud and errors.
3. Technology Solutions: Utilize accounting software with built-in controls that require multiple approvals for transactions, thereby automating part of the segregation process.
4. External Reviews: Engage external auditors or consultants to review financial processes and provide recommendations for improving internal controls.

Other Considerations in the Cash Disbursement Process

1. Invoice Management: Ensure that all disbursements are backed by valid invoices or receipts. These documents should be reviewed for accuracy and compliance with the terms of purchase.
2. Expense Reports: Require detailed expense reports for employee reimbursements, including original receipts and a description of the business purpose.
3. Adhering to Grant Restrictions: Carefully track and report expenses according to the stipulations of grants and donor agreements.

Segregation of duties is essential for maintaining financial integrity in nonprofit organizations. By thoughtfully dividing responsibilities among different individuals and implementing checks and balances, nonprofits can protect their assets, ensure accurate financial reporting, and build trust with donors and stakeholders. Even small nonprofits can adopt creative solutions to achieve effective segregation of duties, thereby safeguarding their financial resources and fulfilling their mission responsibly.

If you have any questions in regards to the cash disbursement process for your organization, please contact your Hawkins Ash CPAs representative.

Matt Neu

I am a senior manager in the Manitowoc, WI, office where I provide audit services to nonprofit organizations, commercial entities, governmental entities and employee benefit plans. In addition, I work with compilation and review engagements. I joined Hawkins Ash CPAs in 1999 and am a member of the Employee Benefit Plan and Nonprofit Service Groups.