Nonprofit Financial Oversight Best Practices

Effective financial stewardship is critical for nonprofits to maintain the trust placed in them by the community
they serve. It is incumbent upon the organizational leadership (both governing board and chief executive
officer) to ensure policies and practices that control the handling and oversight of all financial components are
in place and followed. While trust and partnership are key tenets of a successful board and executive
leadership relationship, the board has the ultimate legal responsibility to ensure the financial controls are
adequate and being followed. Below is a high-level outline of these best practices.

Written Financial Policies

An organization should have written financial policies governing its investments, internal control procedures,
purchasing practices, restricted assets, reserve funds, compensation, expense account reporting, and records
retention. Internal financial management processes should be monitored, including handling of checks, petty
cash, cash disbursements, and payroll management. These documented and utilized controls are deigned to
prevent misuse and misappropriation of assets and should be reviewed annually and examined regularly.

Board Governance and Financial Oversight

Board members must receive adequate orientation and on-going education to include their critical role in
financial oversight. While not all board members have financial backgrounds, all must be equipped to
understand the basic financial reports, expense and revenue reports and trends, and awareness of financial
controls that are in place. Financial reporting should also reflect any significant variance between budget to
actual. Liquidity, cash on hand, debt to equity ratio, revenue and expense trends, and fundraising efficiency
are some of the metrics that can keep the board informed of the financial health of the organization.

Resources for the board’s use to ensure that adequate proper internal financial controls are in place include
a process audit and an annual financial audit. In addition, the role of the treasurer and/or finance committee
is pivotal to provide the financial oversight of the chief executive officer and chief financial officer (if there is
one).

Related Organizational Policies

The following policies should be maintained:

• The organization should perform criminal background checks on all staff and board members; a credit
report check should be performed on any staff or board member who has any access to organization
finances.
• A Whistleblower Policy encourages staff and volunteers to come forward with credible information on
illegal practices or violations of adopted policies of the organization and specifies that the organization
will protect the individual from retaliation.
• A Records Retention Policy defines the necessary records are protected and maintained for the correct
amount of time.

Other Resources

Other resources include:

• Seminars offered by CNM, local universities, and accounting firms
• Publications from BoardSource, accounting firms, etc.

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