By Jeremy G. Hartzell, JD, MBA  

On July 25 and 26, I will be attending PICPA’s Not-for-Profit & Government Accounting Conference in Hershey, Pa. Not only will I be attending, but I am excited that I will be presenting as well. I plan to lead an interactive session on Internal Controls in the Nonprofit Environment, where I will open with thoughts and real-life examples and then engage the audience through questions. It promises to be an engaging and worthwhile topic to discuss.  

Failure to document and implement internal controls in a nonprofit could be a serious mistake. This oversight could lead to both financial and reputational setbacks. And it’s not just “the big guys.” If a nonprofit has cash, uses credit cards, or holds large amounts of inventory, it is at risk of theft or significant financial statement errors. Either of these would create a reputational Tsunami.  

Imagine you are out of town at a conference and have use of the nonprofit’s credit card. When you go to use it, the card is declined. When you call, you find that you are over the credit limit. You also find out that the person who used it previously is nowhere to be found. Have you reviewed your nonprofit’s credit card terms and conditions lately? Sometimes individuals at the nonprofit are personally liable for the charges on the cards.

I served as the treasurer of a significant nonprofit that hosted a large in-person fundraiser with a lot of cash. During my first year at the event I cringed when I saw all of the volunteers handling cash with almost no direction. Fast forward to my last year: we were a well-oiled machine with documented and followed internal controls. Finally, I could sleep at the end of the event knowing the donations went where they belonged. The ease with which a volunteer could have pocketed cash contributions was mitigated with just a few basic internal controls.

Can you imagine if you showed up to your nonprofit on the day of a big Thanksgiving dinner and 10 turkeys were missing? How did this happen? Who had access to the turkeys, and how do we resolve the shortfall on a day when stores are closed? This is a reputational risk caused by a lack of internal controls.  

In my session at the conference, we will discuss ways to limit the possibility of a failure in internal controls. We need to understand why the person receiving donations should not be the person in charge of passing out the same items. We need to know how inventory should be tracked and who should be reviewing the tracking and how often.

Many grant making bodies requires applicants to be audited by a CPA. In this process, the CPA firm will evaluate your internal controls as part of their work. If they find deficiencies, they may issue a letter stating that your nonprofit has deficiencies, significant deficiencies, or even material weaknesses as they relate to internal controls. This letter may prevent your organization from obtaining needed funding until the deficiencies are addressed. During this session, we will talk about the basic steps that your organization can take now to avoid having to deal with this in the future.

At the conference we will talk about a basic level of internal controls that all nonprofits should have and the risks that exists when these controls are not present. I hope you will join me in Hershey so we can explore the importance of this topic and together discuss best practices.

Jeremy Hartzell is the principal in charge of the Pittsburgh office of HBK CPAs and Consultants. He is also a member of the firm’s nonprofit niche. Hartzell has served as treasurer on multiple nonprofit boards and represented some of the largest nonprofits in the Pittsburgh region. He can be reached at jhartzell@hbkcpa.com.

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