Although the CRA has little guidance on internal controls, they are increasingly focusing on internal controls, or the lack thereof, in charities.  Internal controls are “a procedure or policy put in place by management to safeguard assets, promote accountability, increase efficiency, and stop fraudulent behavior.”  A simple example is having two people sign cheques or having two people count cash.  I am hoping that one day CRA will provide greater guidance on their expectations surrounding internal controls but for now here are some thoughts and suggestions.  

In an ideal world, perhaps we would not need internal controls but we certainly don’t live in that ideal world.  Most people are honest, but some are not.  Some are honest but will be tempted if there are no internal controls.  Also internal controls prevent havoc in charities – if you have no internal controls then there are no rules on who can do what.  Imagine if 3 different people each decide to pay the same account from a supplier.  

Good financial controls are a win-win for everyone – you don't want to work for an organization without good procedures or internal controls.  Without proper internal controls, you will not know the rules around spending or protecting assets and you may be blamed for acting inappropriately. Some funders and donors will not support a charity without there being good internal controls as they will wonder about the ability of the charity to safeguard the donation and spend it appropriately.  Good internal controls reduce stress and help prevent or limit personal liability in event of problems.

Here are some good resources on internal controls:

Internal financial controls for charities (CC8) (Charity Commission of England and Wales)

Internal Financial Controls Guidelines for Charities (Irish Charity Regulator)

Internal Controls for Nonprofits (National Council of Non-Profits)

Critical financial internal controls that could shelter the homeless and feed the hungry by Gordon Holley

Here is a CRA internal control checklist for audit of a registered charity that we recently reviewed.

Also you might find one of our general Canadian charity legal checklist helpful.