According to studies done by the top four international accounting firms, nonprofit organizations have an error rate approximately 60% higher than that of for-profit entities. However, some good news in these studies is that over 70% of these errors are basic mistakes such as bookkeeping and recording errors.
1.Incorrectly classifying employees. Employees and contractors require different tax documentation to the IRS. Don’t be swayed by the attractiveness of classifying an employee as a contractor in order to cut down on required paperwork as well as possibly not having to offer a fringe benefit package to a “contractor”. The IRS makes a distinction between a contractor and an employee in that a contractor is responsible for performing a task whereas an employee is also responsible for the means by which the task is completed. When deciding whether a worker is an employee or a contractor, consider the amount of instruction given to them for task completion, specific training afforded to them and whether or not they are reimbursed for out of pocket expenses. For a more detailed explanation of this issue see IRS tax topic 762.
2.Relying too much on volunteers. Volunteers can be a very valuable resource in a non-profit organization. However, one area in which you need to be very cautious is using volunteers in the accounting or process. Accounting software companies offer products that are incredibly user friendly and will do an outstanding job of not allowing things such as out of balance entries or incomplete transactions. However, a volunteer with minimal accounting or bookkeeping knowledge may not pick up on an error that may end up costing you more than you saved by using a volunteer. Even if an independent audit finds errors and supplies you with correcting entries, by that time chances are that you have lost the opportunity to recapture potentially lost revenue.
3.Not Having a Review Process. Proper segregation of duties and having adequate staff to implement a satisfactory review process can be a difficult task for organizations that have one person in the fiscal department. However, that scenario does not make the need for a “second pair of eyes” any less critical. If you are truly a one-person finance department, it is imperative that there is another person brought into the review process. Typically, the Executive Director or Program Managers are not financial people. However, they have a different perspective of the organization by simple design of their duties and they can be an asset in the review process. The Executive Director may have a strong overall agency health perspective whereas the Program Manager, being much more familiar with the day to day activity, may spot an error in coding that is not apparent to the finance person. A review process of internal financial reports by someone other than the preparer is critical for the organization’s financial health.