Revisiting Bank Reconciliations for Nonprofits

Let’s revisit a really important internal control – your monthly bank reconciliations (known with love as bank recs).

Bank recs help ensure that your bookkeeping is in line with your bank activity. They are also a key internal control to ensure that your funds are safeguarded properly with the proper reviews. Reviewing them before running any reports is absolutely essential in ensuring your reports are correct.

Nonprofit bank reconciliations and access recently came into the Detroit news cycle with the allegations of embezzlement by the ex-CFO of The Detroit Riverfront Conservancy.

While fraud of this nature is likely not happening at your organization, these are key controls that should be in place to ensure that it doesn’t happen.

A General Primer: What are Bank Reconciliations?

Bank reconciliations are a process for all bank accounts in which you compare activity in your bank with your bookkeeping. They should be done monthly and can easily be completed by you or your bookkeeper in Quickbooks.

Quickbooks automatically matches items that have been downloaded by your bank & categorized by you to the total bank balance that you enter in. It’s a really good internal control to have two different people do the Quickbooks data entry and the bank reconciliation.

This helps ensure that your accounting data and your money in the bank is being managed properly.

Reviewing Uncleared items: Payments or Deposits

Uncleared items are best looked at by using an example. If you do a bank rec with a 4/30/24 close date, you’ll want to look at the reconciliation reports for uncleared items that have been booked before this date. There are two separate sections in the Quickbooks bank reconciliation report – one for payments or checks, and one for deposits or credits. Items in these areas may not be wrong, but they do warrant a review.

You may have sent someone a check dated 4/29/2024, and that payment may show up as an uncleared item. Since that is very close to the close date of 4/30/24, that payment is likely ok to have not cleared your bank, but you’ll want to keep an eye on that payment in future bank recs to make sure it does clear.

Let’s say you see an uncleared payment or deposit from January 2024. That would warrant an in-depth review before you run any reports. Why? Well, this could be a check that was never cashed, so that may need to be voided and/or reissued. But in this age of electronic payments, we have less paper checks in general, so any stale uncleared items are more than likely an issue.

If it’s an uncleared deposit dated January 2024 on your April 2024 bank reconciliation, a review may show you that this deposit was accidentally double-posted (one cleared in January, and one is uncleared), and your income could be potentially overstated. This is why reviewing the bank reconciliation in detail on a monthly basis is essential in avoiding errors & misstatements.

Management Review & Controls

Once the bank rec(s) has been run by the bookkeeper, and all outstanding issues resolved, the bank rec(s) should be reviewed by the Executive Director or management-level staff outside of the day-to-day bookkeeping.

This ensures that there’s an outside eye on the details that make up your financial statements. They may come back with questions around certain payments or why items have not cleared. Along with the review of the bank reconciliation from Quickbooks, this same reviewer should review all bank account’s monthly bank statements for overall reasonableness & alignment with the bank reconciliation.

The reviewer should access the bank account statements directly from the bank for this review. This is key and helps ensure that the statements have not been altered before given to the ED or reviewer. The reviewer should then document their questions, the discussion and sign-off their review as a part of the monthly close. Depending on the size of your organization, it may be difficult to have a separate person do this review (we know some of you EDs out there are keeping up on the books!).

Don’t be afraid to ask someone on your board to fill this important reviewer role. It’s essential and sets the tone at your organization for strong safeguards around your money.