Many not-for-profit organizations operating in multiple locations have branch networks. We are often asked what the "correct" accounting systems and controls are for an organization with several branch locations. In this article we will briefly look at some of the fundamental underlying issues and address a number of specific concerns.

The Trade-off Between Autonomy and Control

Internal controls must be matched to your organization's philosophy and operating structure. The first step in designing a set of internal controls is for the board of directors to decide on the degree of control that it wants to exercise over branch operations. A substantial range is possible.

At one end of the spectrum is an autonomous organizational structure where each of the branches functions independently of the main organization or head office. An autonomous structure downloads the costs of controls to the branch operations. In this situation the branches would be able to:

• appoint their own board members

• have control over their own finances including record keeping and the raising and spending of money

• issue their own charitable receipts, if applicable.

At the opposite end of the spectrum is an organizational structure where the head office has complete control over branch operations. In a more controlled structure, organization and administrative costs are transferred from branch locations to the head office. In this situation:

• local branch board appointments are approved by the head office

• all financial transactions are run through the head office
• financial and other critical systems are all administered and controlled by the head office

Reality typically lies somewhere between these two extremes. Financial and other controls in a fairly autonomous branch network tend to vary greatly as they are designed by and for the needs of the individual branches. A potential risk to the organization as a whole is that a problem in a branch resulting from inappropriately designed or maintained systems and controls could result in bad publicity. Bad publicity could seriously taint the rest of the organization.

In a more highly controlled environment, the board of the head office would exercise the degree of control they are comfortable with by setting policies for the branch locations. In addition, the head office would have greater assurance throughout the year that policies are being followed provided, of course, there is regular monitoring. The downside of the more highly controlled system is the significant amount of resources (money and volunteer and staff time) required to design, implement, maintain and report on a system of controls for operations at the various branches.

There is no one correct philosophy. We recommend that your board determine the degree of control it needs to exercise over its branch operations at a strategic planning session. Once this decision has been made then appropriate accounting controls and systems can be implemented.

Following are a number of issues we are frequently asked about by organizations with multi-branch structures.

Issuing Donation Receipts

Controls over the issuing of donation receipts are especially important in multi-branch environments. Board members of the registered entity (often only the head office) are responsible for ensuring that all donation receipts issued under its name meet the criteria set out in the Income Tax Act of Canada. Failure to adhere to these regulations could result in the deregistration of your charity. Organizations granting autonomy to branches, while at the same time offering to issue charitable donation receipts on their behalf under the umbrella name of the organization, must ensure that sufficient controls are in place at the branch level to correctly issue receipts. The following areas must be addressed when designing controls:

• receipts must only be issued for donations received and regulations for in-kind donation receipts must be properly followed
• donation receipts must not be issued for any donations where the identity of the donor is not known (i.e. loose collections)
• an accurate and up-to-date donor database should be maintained to promote efficiency of future fundraising
• all donation receipts issued must be reported to Revenue Canada on the annual Registered Charity Information Return (T3010)
• you should have the ability to track sufficient and accurate information to complete the T3010's sections on non- charitable expenses, political activities, fundraising, etc.

Monitoring Branch Finances

The board of the head office needs to determine the level at which they will monitor the financial operations of the branches. A combination of the following procedures could be implemented depending on the degree of control that a head office wants to exercise:

• establish mandatory budgeting, accounting and reporting standards for all branches. A written policy manual is essential.
• require periodic reporting of financial results and budgets to the main branch (monthly, quarterly or annually)
• require detailed head office review of periodic branch financial submissions for accuracy, timeliness and compliance with head office policies
• establish head office policy of visits to branch operations by board and/or staff members to review head office expectations, branch results to date and to provide suggestions for changes and/or improvements.

Control Over Cash Disbursements

Head offices wanting to exercise significant control over branches will accept responsibility for and administer cash disbursements for the branches. In this situation all branch financial transactions would be conducted through the head office bank account and the head office would be responsible for authorizing all disbursements (i.e. signing the cheques). Alternatively, head offices not needing to exercise the same level of control could consider allowing branches to set up their own bank accounts and authorize their own disbursements. Doing so entails appointing branch personnel (staff or branch board members) as signing officers of the organization. The head office board should consider obtaining legal advice to determine its legal liability in this case.

Summary

Determining the degree of control to be exercised over a multi-branch operation requires a board to have a firm grasp on its strategic plan of operations. Only once this plan is known can the appropriate controls be implemented. We strongly recommend that you consult legal counsel to ensure that the liability position of your organization, head office and local branch boards is well understood.