Internal Controls for Payroll

Internal controls are important for any nonprofit.  Even small organizations with limited accounting staff should have some controls in place.  Controls not only help prevent the misuse of the organization’s funds but also contribute to more efficient operations and accurate reporting.

Payroll is normally a significant process within a nonprofit.  The primary risks related with payroll are the risk of ghost employees or employees being paid for hours not actually worked. 

Here are a few controls relating to the payroll process that your organization should consider implementing if you haven’t already.

• Screen employees and perform background checks on all new employees.
• Institute job rotation and mandatory vacation.  Make sure someone else is fulfilling the absent employee’s duties while they are on vacation.
• Review and approve time sheets.  The approval should be done by a supervisor to ensure the hours were actually worked.
• Personnel files should be maintained for each employee.  The file should include a resume, application, pay rate, pay increases, withholdings, evaluations, etc.  A form I-9 should also be maintained for each employee but should be kept in a separate file.
• Review payroll reports for gross pay and reasonableness of deductions.  Payroll reports should be reviewed prior to cash being transferred if a payroll processing company is used. 

Posted by: Carrie Minnich, CPA