It seems a year doesn’t go by without hearing in the news that an organization, created to provide some public service, has in fact done the opposite by misusing funds.

It seems a year doesn’t go by without hearing in the news that an organization, created to provide some public service, has in fact done the opposite by misusing funds. Sometimes it’s an employee who absconds with funds. Or perhaps a board is just lax in filing important tax documents. But every time that happens, people begin to lose faith in nonprofit organizations as a whole.

 If you serve on the board of a nonprofit organization, donate to one or receive services from one, you have a vested interest in making sure the organization is following sound fiscal policies that will help prevent the misuse of funds and keep you out of trouble with the IRS. Some basic principles apply that can be used as a guideline.

 Good financial management begins with a budget. It helps to assure that there will be sufficient income to cover expenses. It also can be used to assure that funds are spent primarily on the stated purpose of the organization. Keep in mind that the activities of tax exempt nonprofits must be substantially related to their exempt purpose. If your nonprofit organized (and received tax exempt status) to serve homeless teens and you have shifted focus to run a daycare for preschoolers, you may find yourself in hot water with the IRS.

 The next important step is accurate and timely financial reports. If a board is not provided complete financial reports at every meeting, they should consider that a red flag. Board members have an obligation to review and make sure they understand the reports that are given. Don’t hesitate to ask questions about the budget or financial reports. If you are wondering about something, most likely others are too.

 Another important facet is making sure your organization is practicing sound financial controls.

Is there appropriate division on labor in the organization’s bookkeeping practices? For example, the person who receives payment should not be the same person who compares payments to receipts. Someone other than the bookkeeper should open bank statements and reconcile them to the checkbook. By dividing roles you reduce the possibility of fraud. Is there appropriate documentation of transactions? These would include signed purchase orders or vouchers for payments, receipts for expenses, and invoices for services. Are time sheets reviewed and approved by a supervisor? Finally, are the financial records reviewed by someone other than the bookkeeper and /or treasurer on a regular basis? Annual audits not only provide some level of security that your financial records are in good order, they can also provide opportunity to learn how to improve procedures.


It is the responsibility of the board of directors of any nonprofit to ensure that the financial “house” is in order.

Georgia Stuart-Simmons is a Community Development Specialist with MU Extension.