Internal Controls: The Importance of Separating Duties for Small Nonprofit Accounting
Strong nonprofit internal controls support accurate reporting, donor confidence, and mission impact. Even small or start up organizations with limited staff can build practical nonprofit accounting controls that reduce risk and support long-term financial health. According to the Association of Certified Fraud Examiners, nearly 30 percent of nonprofit fraud cases occur because the same person handles multiple financial tasks without oversight.
Implementing simple, structured processes can lower that risk and create greater transparency for staff, leadership, and funders.
Read on for practical ways small nonprofits can segregate duties, strengthen nonprofit financial policies, and build internal controls that fit the size and capacity of their team.
Why Segregation of Duties Strengthens Nonprofit Internal Controls
Segregation of duties helps prevent errors, limits opportunities for fraud, and builds clarity in daily workflows. It distributes financial responsibilities so that no single person handles an entire transaction cycle from start to finish. Even small teams can apply this concept without adding staff.
Organizations seeking added structure can review Mission Edge’s nonprofit accounting services for support in building clear processes and transparent reporting systems.
Common Questions About Segregation of Duties
What does segregation of duties mean for small nonprofits?
It means distributing financial tasks across staff, trained volunteers or an outsourced accounting firm so one person does not manage everything from collecting funds to recording transactions, spending funds and reconciling accounts.Is segregation of duties required?
While not legally required for all nonprofits, industry guidance recommends it as part of strong nonprofit accounting controls. Most funders request or expect it as part of standard financial oversight.Can very small teams apply segregation of duties?
Yes. Even organizations with two or three people can rotate responsibilities or involve outsourced accounting help for independent review.
Practical Ways Small Teams Can Segregate Duties
Small organizations often believe segregation of duties is not possible, but there are several cost-effective approaches that strengthen nonprofit internal controls without expanding staff.
Use Outside Accounting for Review Tasks
If staff capacity is limited, organizations can partner with an accounting professional to carry out key review functions.
Examples include:
Preparing monthly bank reconciliations
Oversight of AP and AR duties
Ensuring all transactions have supporting documentation
These review steps reinforce nonprofit financial policies and add an independent layer of oversight.
Divide Tasks by Process Instead of Position
Segregation of financial duties does not require multiple full-time trained staff. Break processes into steps and assign tasks based on workflow, such as:
One person enters bills
Another person approves payments
A third person prepares the monthly reconciliation
This process-focused approach helps distribute responsibilities evenly.
Implement Simple Technology Controls
Digital accounting tools allow small nonprofits to assign permissions that limit who can edit, approve, or release transactions. Examples include:
Read-only access for board members
Separate login permissions for entering and approving transactions
Automatic audit trails for all user actions
According to the National Council of Nonprofits, strong digital permissions reduce risk by giving organizations clearer visibility into activity logs and financial workflows.
Strengthening Nonprofit Financial Policies to Support Internal Controls
Clear nonprofit financial policies help staff understand responsibilities and follow consistent procedures. These policies also establish expectations for documentation, reviews, and approvals. All nonprofits should have a clear, concise grant accounting policy & procedure manual.
To support long-term stability, many organizations pair updated policies with outside guidance. The Mission Edge team outlines several best practices in this related blog post: why accurate accounting is critical.
Key Policies That Support Segregation of Duties
Consider developing or updating a grant policy and procedure manual, keep the following topics in mind:
Cash handling procedures
Bill payment and approval workflows
Monthly bank reconciliation requirements
Expense reimbursement rules
Proper recording of time and resources used on a specific funding source
Documentation and recordkeeping standards
These policies help clarify expectations and promote consistency across the organization.
Quick Answers About Nonprofit Accounting Controls
Do written policies matter for small nonprofits?
Yes. Written policies help organizations maintain accuracy as they grow and onboard new staff members.Who should approve financial policies?
Financial policies are typically approved by the board, often with recommendations from executive leadership.How often should these policies be reviewed?
Policies should be reviewed annually or when organizational changes occur.
In conclusion, nonprofits of all sizes can implement practical internal controls that protect resources, improve transparency, and support long-term impact.
Segregation of duties is achievable for even the smallest teams with thoughtful planning, structured nonprofit financial policies, and clear responsibilities. Small steps build stronger systems that help organizations stay focused on mission delivery.
Need help figuring out your nonprofit’s finances?
From outsourcing payroll to annual audit support, our dedicated accounting team is here to help!
