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Segregation of Duties

An internal control that splits key financial tasks — authorizing, recording, and safeguarding assets — across different people, so no single person controls a transaction end to end.

If the same person can approve an invoice, cut the check, and reconcile the bank statement, there’s nothing structurally stopping (or catching) a fraudulent payment to themselves. Segregation of duties breaks that chain apart — one person requests or approves a payment, someone else issues it, and a third person reconciles the resulting bank activity.

Small nonprofits with lean finance teams often can’t achieve full segregation of duties with staff alone, which is exactly where compensating controls matter: a treasurer or board finance committee reviewing bank statements independently, requiring two signatures above a dollar threshold, or having the external accountant perform monthly reconciliations the internal bookkeeper doesn’t touch.

Auditors evaluate segregation of duties as part of assessing internal control risk, and a documented weakness here — even without any actual fraud found — typically shows up as a recommendation in the audit’s management letter.

Statement of Activities

A nonprofit's equivalent of an income statement — showing revenue, expenses, and the resulting change in net assets over a fiscal year, split by donor restriction.

Where a for-profit income statement ends with net income, the statement of activities ends with the change in net assets — separately for the “without donor restrictions” and “with donor restrictions” columns, plus a combined total. A negative change in unrestricted net assets in a single year isn’t automatically alarming (a planned drawdown of reserves for a capital project, for instance), but a multi-year pattern of it is a real warning sign.

The statement also shows “net assets released from restrictions” — money that was donor-restricted in a prior period but has now satisfied its purpose or time condition and moved into the unrestricted column. This single line is often the clearest evidence, at a glance, of how well an organization is executing against its restricted grants and gifts.

Reading this statement alongside the statement of financial position gives the full picture: activities shows what happened during the year, while financial position shows where things stand at a single point in time.

Statement of Functional Expenses

A financial statement, required for most nonprofits, that breaks every expense down by both nature (what was bought) and function (why it was bought).

This statement is presented as a grid: rows for natural expense categories (salaries, rent, supplies, travel) and columns for functional categories (Program, Management & General, Fundraising) — often with programs broken out individually. A single salary expense might be allocated 70% to Program A, 20% to Management & General, and 10% to Fundraising, based on how that employee actually spends their time.

FASB requires this statement (or equivalent disclosure) for all nonprofits, precisely because functional classification is what makes the overhead ratio and program-spending percentages calculable in the first place — without it, a reader has no way to tell how much of a nonprofit’s spending actually reaches its mission.

Getting the allocation methodology right — and consistent from year to year — matters because it’s one of the first things a grant reviewer, a rating organization, or an auditor checks, and inconsistent allocation logic is an easy way to look either evasive or disorganized, even when the underlying numbers are accurate.