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Keeping Your Balance: The importance of oversight in small organizations

There was recently a story in my local paper about an individual allegedly stealing substantially all the funds from an organization that had been serving young athletes in the area for more than a decade. The organization was well-meaning and had implemented some controls to deter this type of activity; however, the individual was able to leave them broke in less than five months.

There are many organizations out there that operate mainly through the generosity of volunteers and supporters. Our communities are full of organizations that operate without any paid employees, yet have hundreds — or even tens of thousands — of dollars running through their accounts on an annual basis. These organizations come in many forms and provide varying services, from youth sports to literacy programs, from community revitalization to environmental protection.

Most people who volunteer with a local organization have nothing but good intentions and a desire to improve the community they live in, and those people should be commended. However, there are also people in the world who look to take advantage of these situations to enrich themselves. In the last several years, there have been over 250 publicly known embezzlements across the nation totaling more than $17 million from youth sports leagues alone.

Here are just a few quick board responsibilities and best practices to keep in mind:

Understand the entity

Purpose – Most organizations have been established to accomplish a specific objective or objectives. This objective may be laid out in the entity’s mission statement, by-laws, or other document. If your organization doesn’t have a clearly stated purpose, now is a great time to put one in writing.

Structure – In order to ensure that the entity is meeting any/all reporting requirements it is important to know how it was formed, if it was legally established at all. If you find that the group has not been legally formed, that should become a priority. Not only does the legal formation of an organization provide a level of credibility for potential donors, but it can also limit the personal liability of those running it.

Internal controls – Among the most important duties of the governing board is to ensure that the organization has a good system of internal controls in place to ensure accountability. In a good system of internal controls, controls should be documented and the document should be updated/reviewed at least annually. Any potential risks or weaknesses encountered in the documentation process should be addressed with mitigating controls or noted as areas for extra monitoring.

Oversight and monitoring

Due diligence – Critically review monthly financial reports and minutes, don’t just accept them. I have seen one situation where a bookkeeper submitted the same monthly report to the board four months in a row without any questions being asked — that bookkeeper then began stealing money because nobody was paying attention.

Regularly scheduled meetings – Whether in person, or via conference call, having meetings on a regular basis should foster better organizational oversight. Attending one annual meeting is rarely enough to provide proper direction for an organization. Even groups established for a seasonal purpose, such as a summer concert series, should still have the finances monitored in the off season.

Budget monitoring – Proper budgeting can be used not only to provide a clear plan of activity for a given period, but also as an effective internal control. Budget to actual comparisons prepared on a short-term basis can easily be used to identify significant variances, which should be explained or investigated.

Accountability

Internal – Having specific deadlines for periodic financial reporting and ensuring that those timelines are met will hold individuals with those responsibilities accountable and will reinforce the need for timely recording and summarizing of information. Proper review — and verification, if necessary —of information provided will help the oversight body to gain confidence that everything is operating as it should be within the organization.

External – Being able to demonstrate proper controls and monitoring to potential donors, government regulators and the general public is of the utmost importance to small organizations with limited resources. Inspiring confidence in the organization can have exponential effects on success: People will not only be more willing to donate resources, but also may want to get involved and further promote the cause.

Michael DeBadts, CPA, is a principal at Mengel, Metzger, Barr & Co. LLP in Rochester, New York.  He may be reached at mdebadts@mmb-co.com.

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