Internal Accounting Controls and the Importance of Perception
Internal accounting controls are an everyday fact of life. They protect nonprofit organizations from many types of risks ranging from theft, fraud, and diversion of assets, to errors and mistakes, to highly sophisticated scams and cyber security threats. Organizations must maintain vigorous and sustainable internal accounting control systems. However, if the perception of an organization’s internal accounting controls is weak, its ability to battle these threats will be greatly reduced.
In our urgency to construct and maintain the best possible internal accounting controls (IACs), we tend to focus too much attention on the structure, safeguards, and procedures while not giving equal weight to perception, acceptance, and enforcement. To improve IAC system effectiveness, we need to include perception as a key system goal and performance indicator.
The perception associated with a control can be as important, if not more important, than the actual control by itself. Expanding perception of IACs will result in a direct corresponding improvement in IAC system effectiveness.
To raise the perception of your organization’s IACs, consider these three factors to help individuals better understand their responsibilities within IAC systems: awareness, seriousness, and culture.
Awareness must be considered first. Effectiveness of most IACs can be enhanced through greater awareness. When an IAC noncompliance finding occurs, the most common reason for noncompliance is lack of knowledge that the control exists. Raising awareness can be simple and effective as integrating IAC awareness and compliance into as many discussions, management meetings, and routine communications as possible.
Seriousness is the best motivator to use to raise awareness. IACs are designed to safeguard assets and the reputation of an organization. This purpose must be regularly communicated to improve understanding and acceptance of IACs. To drive home the seriousness, enforcement measures must also be regularly communicated and adhered to without exception. If enforcement is frequently disregarded, controls will quickly become ineffective.
Communications must be directed internally to staff and volunteer leadership and externally to constituents and the general public. Both groups interact with a nonprofit organization’s systems. If IACs are not adhered to, assets will be exposed to increased risks. Incomplete travel expense reports, disregard of two-step verification processes, and exceeding authority limits on contract approvals are just a few routine examples of noncompliance audit findings where offenders plead ignorance or, worse, choose to ignore established protocols.
Culture brings awareness and seriousness together through the common bond of a shared commitment to best practices. Organizations that display a commitment to sound business and management best practices will convey a sense of confidence that funds entrusted to the organization will be well-managed, protected, and used in alignment with mission and funder intent.
Planning Tip – Use onboarding opportunities to stress the importance of internal accounting controls (IACs). Include IAC system overviews for new Board and volunteer leadership in orientation sessions. For new staff, provide job-specific IAC system and general information technology system security protocol training sessions so weaknesses are mitigated on the front-end for individuals new to an organization.
Lastly, to optimize the perception of your organization’s IACs, you will need to periodically gauge acceptance, compliance, and enforcement. Expand your risk management assessments to include periodic internal audit procedures related to IACs. When available, use third-party service providers to further test your systems and provide feedback, such as technology and software providers, banks, and insurance companies. Based on these efforts, adjust staff and volunteer leadership training to promote improved awareness, acceptance, and adherence to controls.
