Most small, nonprofit organizations tend to operate rather informally. The members of the board of directors, some who also serve as officers, are all volunteers. These volunteers dedicate substantial time towards keeping the organization functioning and working to fulfill its mission. The volunteers often become friends, which can tend to further decrease levels of operational formality.
Operational informality can generally work well in the small, nonprofit context – except when it comes to managing money. Informality in handling money creates risks for a nonprofit organization. If the organization accepts donated funds, collects membership fees, and/or handles fundraising dollars, the organization must establish safeguards for the handling and management of that money.
There are several reasons why informality in handling money is unacceptable. The people who donate money to your organization have at least a couple things in common: they believe in the mission and purpose of your organization, and they assume that the money they contribute will be used for its intended purposes. The ability of your nonprofit entity to raise funds in the future depends upon its reputation for handling money well.
In addition to reputation concerns, there are legal ramifications to the decision of a nonprofit to receive money. When money is received by a nonprofit, Indiana law imposes certain legal obligations upon the entity regarding the holding and spending of that money. When an entity fails to act reasonably in carrying out these duties, the entity can be sued for breach of that duty.
In most instances, a director or officer cannot be sued personally for the lack of care taken by a nonprofit corporation. However, if the director or officer fails to perform his or duties as required by law, and that failure results from willful misconduct or recklessness, the director or officer can also be held personally liable for the entity’s losses.
Finally, there are criminal law ramifications for any director or officer who actually takes an organization’s money and spends it for himself or herself. In Indiana, If the total amount stolen by the person exceeds $750, that person could be charged with a felony.
Appropriate safeguards for a nonprofit in the handling of money focus on two objectives: transparency and accountability. The best practices that promote transparency and accountability include the following:
- Checking Account. The entity’s checking account should be set up to require two signatures on every check. The treasurer should be one of those signers, and any other officer of the entity can be designated as the other signer. The board should approve the check signers on an annual basis, and that approval should be reflected in meeting minutes. Receipts received in return for payments made by checks should be retained and copies included by the treasurer in regular financial reports to the board.
- Online Account Access. The two check signers, at a minimum, should have online access to the entity checking account. A third officer could be provided the login information, as well, as a means of increasing transparency and accountability. Having more than one person with access to monitor the account online simply provides a deterrent to any misuse of funds. The board should appoint the persons who will have online access on an annual basis. The persons with access should be asked to monitor account activity on a regular (weekly or bi-weekly) basis.
- Debit and Credit Card Use. Many nonprofits provide the treasurer or other officer with a debit card or credit card for convenience in making purchases on behalf of the nonprofit. The board should adopt policies for debit/credit card use that includes the following:
- Only One Card. Only one debit or credit card should be permitted. The board should decide which officer will possess the card and use it for purchasing.
- Spending Limit. A spending limit should be set by the board, which would require board pre-approval for any amounts that will be spent above the limit using the card. For many nonprofits, a $100 to $200, per expenditure spending limit may be appropriate.
- Receipts to Support Debits. The board should require the person using the card to retain every receipt received for every expenditure. Receipts should be scanned or copied to be included as part of the treasurer’s regular financial reports to the board of directors.
- Cash Receipts. The board should establish a written policy for the handling of cash received at events. This policy could include the following:
- A Minimum of Two. A minimum of two persons should be designated to participate in the receipt of cash at an event.
- Sign-Off on Starting Petty Cash. If petty cash is maintained to provide change, a form requiring both persons to sign off on the beginning amount of petty cash should be used.
- Counting at Event End. All cash should be counted at the end of the event, the total amount recorded on the cash form, and signatures as to accuracy of the amount required from the two persons receiving the cash. Both persons should photograph the form after it is completed and one of them should email the photo as an attachment to all officers at the end of the event as documentation of the cash received.
- Timing of Deposit. Cash received at an event should be required to be deposited in the bank no later than 24 hours after the event is completed or the next business day. The deposit slip should be retained to be provided to the treasurer to be included as part of the next financial report to the board.
- Financial Reports. The board should set a policy for the timing of financial reports to be provided by the treasurer. The frequency should be no less than bi-monthly, and preferably monthly. If the board does not meet every month, the reports can be sent by email, and then all reports made between meetings can be approved by the board at the next meeting. The documents supporting the financial report need not be printed to paper – electronic copies as email attachments, circulated to board members or posted them in a portal for board access would be adequate. With the ease of scanning technology and printing to PDF, there is no reason not to include the following documents as part of the financial report packet:
- A printout of the check register dating back to the last report.
- A copy of the monthly bank account statements received from the last report.
- If a credit card is used, a copy of the credit card statements received since the last report.
- All receipts may be included as supporting documentation, or at a minimum be available to board members upon request.
- Recording of Board Approval. Whenever the board is approving a financial report, that approval should be recorded in written meeting minutes. The treasurer should verbally summarize the report during the meeting, and the vote to approve made after the report is complete.
- Annual Financial Reports. Even directors of small nonprofits should consider creating, and making available, annual financial reports of the entity’s financial activities. The availability of financial reports is an act of transparency that will further enhance the reputation of the organization.
- Report Theft Immediately to Law Enforcement. If any of the board members learn that a blatant misuse or theft of nonprofit funds has occurred, a report should immediately be filed with local law enforcement. It is not up to the board to decide whether the misappropriation rises to criminal conduct or not. While this may be difficult to do when the person who is culpable is also a friend or colleague, a director’s duty to the organization and to the community of people the organization supports requires a report to be made.
If misuse of funds is discovered and not reported, but attempted to be resolved internally, the actions of the directors making that decision are likely crossing over into the reckless or willful misconduct zone – rendering them potentially personally liable in a civil context if the cover-up is discovered later. Covering up and the failure to report a potential crime can also have potential criminal ramifications for everyone involved. The failure to report misuse of funds could also have a potentially negative impact on a nonprofit corporation’s 501(c)(3) tax exempt status.
These safeguards are not specifically required by law. But they are strongly recommended as a means of ensuring best practices in the handling of your organization’s money. To the extent that a board adopts these policies and follows them, the chances of misuse of funds is minimized. But if misuse should occur, these safeguards will help shorten the amount of time that elapses and the amount of money that is misused before discovery occurs. These safeguards for the handling of your organization’s money are vital to the success of your organization’s fulfillment of its mission and purpose.