Good Intentions Are Not Enough: Simple Governance for NPOs
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Non-profit organisations (NPOs) exist to make a difference. They may help children, support communities, protect animals, provide education, care for vulnerable people or support many other important causes.
Most NPOs are started with good intentions. But good intentions alone are not enough to run an organisation properly.
An NPO receives money from donors, funders and sometimes the public. These people trust the organisation to use the money for the purpose it was given. They also expect the organisation to keep proper records and to be able to explain how the money was spent.
This is where good governance and internal controls become important.
Understanding What Type of Organisation You Have
In South Africa, people often use the term “NPO” to describe different types of organisations.
An organisation may be a Non-Profit Company (NPC) registered with CIPC. It may also be registered as an NPO with the NPO Directorate. Some organisations are also approved by SARS as Public Benefit Organisations (PBOs).
An organisation can have more than one of these registrations.
Each registration comes with its own requirements. There may be annual returns, reports, financial statements or other documents that must be submitted.
The people running the organisation need to know exactly what registrations it has and what must be done every year.
Missing important deadlines can create serious problems and may even put the organisation's registration at risk.
The Board Must Do More Than Attend Meetings
Having a board does not automatically mean that an organisation has good governance.
Board members have real responsibilities.
They need to understand what is happening in the organisation. They should know where the money comes from, how it is being spent, what risks the organisation faces and whether management is doing what it should be doing.
Management is responsible for the daily running of the organisation.
Finance and administration staff deal with payments, invoices, bank accounts, records and other daily transactions.
These roles should not all be controlled by one person.
This can be difficult in a small NPO because there may only be a few employees. However, even a small organisation needs some form of checking and approval.
One Person Should Not Control Everything
One of the biggest risks in any organisation is allowing one person to control a transaction from beginning to end.
For example, the same person should not be able to prepare a payment, approve the payment and then check the bank account afterwards.
This does not mean that the person cannot be trusted.
It simply means that mistakes or problems may not be noticed.
People make mistakes. Payments can be duplicated. The wrong amount can be paid. An invoice can be entered incorrectly. In some cases, money can also be stolen.
Having another person check the work protects both the organisation and the employee.
Internal Controls Do Not Have to Be Complicated
The words “internal controls” can sound technical, but the idea is actually very simple.
An internal control is a step that helps prevent, find or correct a problem.
For example, requiring two people to approve a large payment can help stop an incorrect or unauthorised payment before it happens.
Checking the bank account against the accounting records every month can help find mistakes after they happen.
If a problem is found, the organisation should correct it and then change the process where necessary so that the same problem does not happen again.
A good system therefore tries to do three things:
Prevent the problem. Find the problem. Fix the problem.
Small Problems Can Become Big Problems
Many NPOs experience the same problems.
Board meetings happen, but the minutes are not completed or signed.
Bank reconciliations are not done every month.
There is no proper list of the organisation's computers, furniture and other assets.
Policies are explained verbally but never written down.
One person is responsible for too many parts of the financial process.
These problems may seem small when everything is going well.
The problem is that they can continue for months or even years without anyone noticing.
By the time something serious happens, it may be too late.
Imagine an NPO with one trusted bookkeeper who has worked there for many years.
Over time, that person is given more responsibility. She prepares payments, approves certain payments and does the bank reconciliation herself.
Nobody checks her work.
Small personal payments then start appearing among the normal business payments. Each payment is small enough not to attract attention.
Eventually, somebody asks a very simple question:
Who checks the bank reconciliation?
The answer is nobody.
By that stage, the organisation may already have lost a large amount of money.
The important lesson is not that every employee is dishonest. The lesson is that no employee should be placed in a position where there are no checks.
Funders Want Proof
Funders want to know that their money is being used properly.
It is not enough for an NPO to say that it is doing good work. The organisation must be able to prove what happened to the money.
Poor financial records can make funders nervous.
If reports contain errors, supporting documents are missing or financial controls are weak, a funder may start questioning whether the organisation can manage its funding properly.
In serious cases, funding may be stopped or money may have to be paid back.
Good financial controls therefore do more than protect money. They help protect the organisation's reputation and future funding.
The Accountant Also Has a Responsibility
Accountants working with NPOs should also protect themselves.
If an accountant notices a problem, it should be raised and recorded in writing.
Important concerns should not only be discussed verbally.
The accountant should also avoid being responsible for both processing and checking the same transaction.
Deadlines are important, but they should not be used as a reason to skip important checks.
Good records show what was done, what was checked and what concerns were raised.
Simple Steps That Make a Big Difference
Good controls do not always require expensive systems or additional employees.
An NPO can start with simple steps.
Payments should be prepared and approved by different people where possible. Approval limits should be written down so that everyone knows who may approve different amounts.
Bank reconciliations should be completed every month and reviewed by someone other than the person who prepared them.
The organisation should keep a list of its assets and check those assets at least once a year.
Important policies should be written down.
The board should receive regular financial information instead of waiting until the end of the year.
Staff should also have a safe way to report concerns.
Access to accounting systems, banking systems and other important information should be reviewed regularly. When an employee leaves, access should be removed immediately.
The Bottom Line
NPOs are built on trust, but trust needs to be supported by good systems.
Good governance does not need to be complicated.
Know who is responsible for what. Keep proper records. Check the bank account. Make sure payments are approved. Write down important decisions. Give the board useful information. Fix problems when they are found.
These may seem like simple administrative tasks, but they protect the organisation, its employees, its board members, its donors and the people it was created to help.
An NPO's mission may be what inspires people to support it.
Good governance is what helps make sure that mission can continue.
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