Building Trust and Accountability: A Guide to Nonprofit Internal Controls Policy

Picture this: A nonprofit organization launches an ambitious new program, only to discover months later that inconsistent financial processes have led to overspending, duplicated payments, and critical delays. Now imagine an alternative scenario where every financial process is clearly documented, roles are well-defined, and checks and balances are in place for all your various financial responsibilities. The difference? A well-implemented internal control policy.

An internal control policy is the backbone of an organization’s internal controls—a set of rules and processes designed to protect its resources, ensure accurate reporting, and promote operational efficiency. For nonprofits, which rely heavily on trust and accountability, these policies aren’t just helpful—they’re essential.

By documenting clear internal controls, nonprofits can build confidence with stakeholders, prevent fraud, and ensure their mission-driven work thrives without unnecessary disruptions.

The Purpose of an Internal Control Policy

Internal control policies serve as a guidebook for consistency and accountability. They are particularly useful when onboarding new staff or volunteers, ensuring that knowledge isn’t siloed within specific individuals but is accessible across the organization.

For example, a newly hired finance manager is stepping into a nonprofit with no formalized internal control policy. Every process—such as how to handle invoices or who approves expenses—would need to be learned on the fly, creating opportunities for mistakes and delays. By contrast, an established internal control policy offers clarity and structure, empowering new staff to hit the ground running—and providing an accessible reference so the staff are confident they are doing their work correctly.

Beyond onboarding, these policies foster operational transparency, so all staff members understand the organization’s expectations and procedures. Whether it’s preventing financial mismanagement or mitigating compliance risks, a strong internal control policy ensures every action aligns with the nonprofit’s mission and values.

Do All Nonprofit Organizations Need an Internal Control Policy?

Absolutely. Every nonprofit, regardless of its size or focus, can benefit from an internal control policy. Why? Because no organization is immune to financial risks, operational inefficiencies, or compliance challenges.

Consider a small community nonprofit that receives a grant for the first time. Without proper controls, the organization may inadvertently misuse funds, jeopardizing both its grant eligibility and reputation. On the other hand, a large nonprofit managing multiple programs may face complex risks, such as fraud or data breaches, if clear policies aren’t in place.

Internal control policies are especially critical for organizations with diverse revenue streams—donations, grants, and earned income. These policies help track funds accurately, ensuring compliance with donor restrictions and legal requirements. Whether you’re managing $50,000 or $5 million, an internal control policy protects your nonprofit’s mission and sustainability.

Who Is Responsible for Implementing and Managing Your Policy?

Internal control policies thrive under shared responsibility, with key roles across the organization contributing to their success:

• Leadership: Sets the tone by prioritizing compliance and accountability. Executives and board members ensure policies align with the organization’s mission and values.
• Finance Teams: Handle the nuts and bolts—documenting procedures, conducting reconciliations, and overseeing daily transactions.
• Compliance Officers or Human Resources: Monitor adherence to policies, ensuring all departments follow established controls and address potential risks.
• Department Managers: Act as enforcers, implementing policies within their teams and addressing any deviations.

By fostering collaboration across these roles, nonprofits can ensure their policies are not only implemented but also sustained over time.

What Should Be Included in Your Internal Control Policy?

To design an effective internal control policy, you need to address key areas that cover financial management, operational security, and compliance. Your internal control policy should be specific to your organization, systems, and staff capacity. Here are a few suggestions on what to make sure you include in your internal control policy:

Financial Controls

• Set timelines for monthly bank reconciliations, such as completing them by the 10th of the following month.
• Require pre-approvals for expenses over a defined threshold to avoid unplanned spending.
• Establish protocols for fixed asset counts and managing departmental budgets to prevent overages.

Separation of Duties

• Ensure different staff members handle receiving, inputting, and depositing funds to reduce fraud risks.
• Crosstrain different staff members so other people can step in if someone is on vacation.
• Rotate responsibilities for cash counts and avoid letting authorized signers prepare checks.

Documentation Controls

• Mandate receipts for transactions over a certain amount (e.g., $50).
• Use standardized forms for expense reimbursements and specify retention timelines for financial documentation.

Personnel Controls

• Require background checks for new hires in finance-related roles.
• Enforce a policy of five consecutive vacation days annually to help identify any irregularities. If a staff member is not following controls—intentionally or unintentionally—it’s more likely to be noticed if someone else is doing their work for five consecutive days.
• Implement a whistleblower policy to encourage anonymous reporting of unethical behavior.

Physical Controls

• Limit access to cash registers and safes to specific staff members.
• Install security cameras in areas where cash is handled.
• Conduct regular inventory counts of physical assets, like equipment or supplies.

IT Controls

• Require individual logins for financial software and implement multi-factor authentication (MFA).
• Schedule automatic password resets every 90 days to enhance security.
• Maintain an audit trail to track user activity in key systems.

These can be combined into one single document, or you can break your internal control policy into several different documents, depending on who will be managing those policies. For example, your HR team may want to incorporate the personnel controls in their larger HR handbook.

Internal Control Policy Sample for Nonprofits

Here’s a sample outline to help you design your own internal control policy:

1. Purpose

Provide a clear, overarching statement about what your internal controls policy is and why you have it.

2. Scope

Highlight who this policy applies to, such as all employees, board members, and volunteers who help with financial tasks.

3. Key Principles

This is where you outline the different areas, such as separation of duties, expense approvals, and documentation controls.

4. Responsibilities

Outline the expectations for different parts of the organization. For example, leadership will develop and implement the policies, employees will follow the polices, and the board will regularly audit and approve changes to the policies.

5. Training

Document the training available and expectations for who will take the training and when, such as at onboarding and annually after the financial audit.

6. Review and Updates

Set a timeline for when your internal control policies will be reviewed and by whom.

7. Reporting and Compliance

Establish a process to audit compliance, such as running an internal audit and pulling logs from your fund accounting system on a quarterly basis. Also provide a way for staff to report irregularities.

This framework can be easily customized to your organization’s specific needs.

Implementation and Management of Internal Control Policies

Creating policies is one thing—enforcing them is another. Here are actionable tips for implementation and management:

Get Leadership Buy-In

A culture of compliance starts at the top. Secure leadership’s involvement by connecting policy enforcement to organizational success during strategic sessions. Inspire them to model compliance, setting a strong precedent for employees.

Establish Training

Build training programs with relatable, real-world examples to ensure staff understands how policies apply in daily operations. Require the training for new hires, and have current employees take a refresher every year.

Review and Update Your Policy

Conduct detailed audits using best practices to address gaps and optimize effectiveness. Use checklists to maintain consistency and accountability, and plan regular reviews to integrate legal updates and adapt policies to organizational growth and change. You will likely get feedback from auditors on your internal controls, so make sure those updates get added to your policy after each financial audit.

How Technology Can Support Internal Controls

Technology plays a vital role in streamlining internal controls for nonprofits. Modern financial software offers features like:

• Automation: Simplify repetitive tasks such as invoice approvals and payment processing.
• Audit Trails: Track user actions to identify unauthorized changes or errors. Easily see whether your staff is following your guidelines for separation of duties.
• Data Backup: Protect sensitive information with regular backups and disaster recovery plans.
• Multi-Factor Authentication: Keep your sensitive financial data out of the hands of bad actors by using an extra layer of authentication.
• Role-Based Permissions: Easily set permissions based on the rule of least privilege, so people only have access to the parts of the system they need to do their job.

Along with training on your internal controls, it’s important to stay up to date with the functionality of your fund accounting software. Know what is possible and available to you by attending product updates and subscribing to training provided by your vendor.

Strengthen Your Nonprofit with Internal Controls

Internal control policies are more than just a formality—they’re a critical tool for protecting your nonprofit’s resources, ensuring compliance, and building trust with stakeholders. By implementing clear policies and leveraging technology, your organization can operate more efficiently and securely.

Want to take the next step? Explore our white paper, How to Build Trust with Strong Internal Controls, to strengthen your nonprofit’s governance framework today.