Financial Management

  • Overview
    • By law, any tax exempt organization promises that it will use its assets in accordance with its exempt purpose.
    • Often times the board treats financial management duties as less important than issues that directly affect furthering the mission of the organization.
    • The board must take an active role in safeguarding their organization’s assets using strong policies, solid budgets, and by overseeing the financial operations.
  • Important Components
    • Internal Control
    • Budget
    • Expense Policies
    • Financial Statements

Internal Control

  • This is a structure that protects the organization from the misuse of their assets, mainly cash. Misappropriation of assets can occur in the following ways:
    • Taking cash while processing donations
    • Entering checks in the accounting system as valid bill payments when the check was made out to an employee
    • Using assets for personal purposes
  • CPAs often help organizations strengthen their internal control structure, as this is something we offer our clients
  • Implementation Basics
    • Acknowledge the need to protect all the assets of the organization
    • Require all transactions be documented
    • Review bank statements
    • Limit access to the assets
    • Have an active board or board committee
    • Require all payments to officers, board members and directors be approved by the treasurer or a different independent member of the board
  • Internal Control Components
    • Control Environment
      • creating an environment where all employees, volunteers and all others involved with the organization are committed to taking the steps to protecting the organization’s assets
    • Risk Assessment
      • assessing possible “worst case scenarios” to prevent any possible dangers to the organization
    • Control System
      • requiring there be different people performing different tasks, as referred to as segregation of duties
    • Communicating & Providing Information
      • keeping strong communication roles and responsibilities to all involved in the organization as well as a reporting system that accurately reflects and records all financial activities of the organization
    • Monitoring
      • reviewing the effectiveness of the internal control structure periodically


  • Budget Review and Approval
  • The board’s initial step in financial oversight should be adopting an annual budget before the beginning of the year.
  • Approval of the budget gives management the permission to operate during the year, but without approval the organization is restricted from spending any money during the year.
  • Comparing the budget to what was actually spent and establishing limits for acceptable differences in the amounts that won’t need board approval is also a step that the board needs to take.

Financial Statements

  • It’s required by the IRS that all exempt organizations keep adequate books and records by maintaining a set of books that will make generating financial statements accurate and complete. Just maintaining a checkbook will not accomplish that.  Failure to maintain adequate books and records could very well result in an organization losing their exempt status.  The board should seek outside assistance if they lack the staff to fulfill this financial oversight.  The board should decide which level of financial statements is required to effectively manage the organization.


  • Types of Financial Statements
    • Basic
      • Financial statements created by CPAs that provide no assurance and can be printed from a computer system without a report and provided to the organization
    • Compiled
      • Sometimes prepared with footnotes, these financial statements require minimal standards for the CPA to follow and is similar to basic financial statements. Compiled financial statement without disclosures or footnotes are not to be provided to outside users.
    • Unaudited Reviewed
      • This is the next highest level of financial statements and always includes footnotes or disclosures. The CPA must meet more standards and perform more procedures for these financial statement than for the compiled ones
    • Audited
      • This is the highest level of assurance a CPA can provide to an organization. The purpose is to examine the financial statements and determine if they are in compliance with the correct regulations.
    • Internal
      • Different from financial statements used externally, these statements provide information needed by management to make decisions for the organization.

Expense Policies

General Requirements

  • The government sees tax-exempt organizations as trustees who receive public funds and expenses those funds in a way that benefits the public
  • Organizations must carefully document expenses and prove the expenses relate to their exempt purpose
    • If not documented, the IRS assumes those expenses do not relate to the exempt purpose and are therefore personal expenses until the organization proves otherwise
    • The greater the amount of undocumented expenses, the greater the risk of the organization losing their exempt status

Expenses Requiring Additional Safeguards

  • The board should have specific policies in place for certain types of expenses.
  • Credit Card Expense Policy Basics
    • Require proper documentation supporting the expense
    • Prohibit using the card for personal items
    • Create a clause that allows the organization to include all undocumented expenses on their w-2 if not reimbursed
  • Travel Expense Policy Basics
    • Include how employees will be reimbursed for the business use of their personal vehicle
    • State guidelines on what is and is not appropriate when it comes to lodging
    • State guidelines for meals
  • Entertainment Expenses
    • With the new Tax Cuts and Jobs Act, entertainment expenses are no longer deductible
    • All meals that aren’t held in a place conducive for business discussions is considered an entertainment expense then is therefore not deductible
  • Expense Reimbursement Plans
    • The organization must have an accountable reimbursement plan
    • Employees should be required to submit expense reports within a reasonable timeframe before reimbursement occurs
    • Any reimbursements completed without a proper plan in place is considered compensation and must be included on the employee’s w-2