Effective accounts payable controls are essential for nonprofits to protect financial integrity, prevent fraud, and maintain compliance. Establishing strong internal processes safeguards assets and improves financial efficiency. Below are the top accounts payable controls that every nonprofit should implement, with practical solutions for organizations with limited resources.
1. Separation of Duties
One of the most critical accounts payable controls is ensuring that financial responsibilities are divided among multiple individuals to prevent fraud and errors.
Best Practice for Larger Teams:
- One person authorizes the invoice.
- A different person processes the payment.
- A third person reconciles bank statements and verifies payments.
Solutions for Small Teams:
- Implement a dual-approval process for invoices and payments.
- Utilize board members or external reviewers to oversee financial transactions.
- Leverage accounting software with built-in approval workflows to automate oversight.
2. Invoice Approval Process
A well-defined invoice approval process ensures that only valid and necessary payments are made.
- Require all invoices to have supporting documentation (purchase orders, receipts, contracts).
- Set up an approval hierarchy based on dollar thresholds.
- Use digital workflow tools to track approvals and maintain an audit trail.
3. Vendor Management and Verification
Prevent fraud by verifying vendor legitimacy and monitoring vendor transactions.
- Establish a vendor onboarding process, including tax ID verification and legitimacy checks.
- Conduct periodic vendor audits to detect duplicate payments or suspicious activity.
- Restrict the ability to add or change vendors to specific, authorized personnel.
4. Dual Control Over Payments
Restrict access to payment processing and implement verification procedures.
- Require two levels of approval for payments above a certain threshold.
- Ensure electronic payments and wire transfers require secondary authorization.
- Regularly review payment reports for unusual transactions.
5. Bank Reconciliations and Regular Reviews
Reconciling accounts regularly helps catch errors and fraudulent transactions.
- Perform monthly bank reconciliations to compare bank statements with recorded transactions.
- Assign reconciliations to someone who is not involved in invoice processing or payments.
- Utilize accounting software with automatic reconciliation features.
6. Expense Policies and Documentation
Having clear policies on allowable expenses helps prevent unauthorized spending.
- Create and enforce a written expense policy with spending limits and approval requirements.
- Require itemized receipts and detailed descriptions for all reimbursement requests.
- Conduct periodic internal audits to ensure compliance.
7. Implement Automated Accounting Tools
Technology can strengthen internal controls and reduce manual errors.
- Use accounting software to track invoices, payments, and approvals.
- Set up automated workflows for invoice processing and payment approvals.
- Utilize alerts for unusual transactions or duplicate invoices.
8. Fraud Prevention Measures
Proactively safeguard against fraudulent activities by implementing strong oversight.
- Rotate financial responsibilities periodically to avoid undue influence by one individual.
- Require mandatory vacations for finance personnel to allow independent reviews.
- Educate employees on recognizing and reporting suspicious activity.
A secure accounts payable cycle is essential for nonprofits to maintain financial integrity and donor trust. Whether your nonprofit has a large accounting team or a small staff, implementing these key accounts payable controls will help protect against fraud, errors, and inefficiencies.
Need Help Strengthening Your Accounts Payable Process?
McGovern Consulting Group offers tailored solutions to improve your accounts payable controls and enhance financial security.
Contact us today to learn more!
