Financial Health & Controls Screen
Financial Health & Controls Screen
The Financial Health & Controls Screen is a structured, document-based diligence service designed to help funders identify potential financial and operational risks in prospective or current grantees. This flat-fee service applies a standardized checklist methodology to assess select indicators of financial resilience, internal controls, and transparency, providing a consistent, time-saving tool for risk awareness and documentation.
Deliverable: A completed checklist indicating whether any risk indicators were observed for each criterion, based solely on the submitted documentation. Items may be flagged for potential concern, or marked “Not Available” if the underlying data is missing. Brief administrative notes are provided to support client interpretation and next steps.
Scope of the Review
The review is based exclusively on documentation submitted by the grantee and covers only the most recent three fiscal years for which financial statements are available. It includes the following:
- Audited financial statements covering the most recent three years available
- Governance documents (e.g., bylaws or equivalent)
- Operating budget
- Management letter and internal controls letter from the auditor
- List of top five donors with amounts contributed annually over the past three years
- Registration certificate
- Organization Information Form
- Titles and bios of finance/accounting staff or contractors
Any additional materials (e.g., financial policies, grant budgets, internal procedures) are outside the scope of this service.
If a document is missing or a data point cannot be verified, the corresponding checklist item will be marked “Not Available.” It is the client’s responsibility to assess whether such gaps warrant further review in the context of their risk appetite or grantmaking policies.
Review and Flagging Criteria
The table below outlines the standardized review criteria used in the Financial Health & Controls Screen. Each row specifies the criterion/document, the administrative screening process applied, and the objective conditions that would trigger a flag for further consideration.
Criterion/Source | Screening Process | Flagging Criteria |
Audited Financial Statements showing 3 years of data | Check for an Independent Auditor’s Report. If unavailable, accept reviewed or compiled statements from an independent accountant, or internal reports such as an income statement and balance sheet. | Not audited |
Audit Opinion & Findings | Review the Independent Auditor’s Report | Audit opinion is modified, qualified, adverse, or disclaimed, or material control weaknesses identified by the auditor remain uncorrected in later years. |
Audit Management Letter: Internal Controls/Segregation of Duties | Review audit notes for internal control concerns and confirm that key financial duties are shared among multiple individuals. | Auditor notes ‘lack of internal controls’ or ‘limited segregation’; Material weaknesses in internal controls. |
Annual Financial Balance: Total Revenue vs. Expenses (3-Year Review) | Review total revenue vs. expenses for each year and note surplus or deficit, and trends. | Year-over-year deficits |
Income & Expense Categories: Material Changes | Review financial statements for each year. Identify any material increases or decreases in major categories such as Donations/Grants, Program Expenses, and Administrative/Fundraising Expenses. Flag unexplained or abrupt shifts. | Missing breakdowns by program/admin; unexplained large year-over-year changes |
Net Assets | Review Statement of Financial Position for each year. Review with and without Donor Restrictions. | Declines in unrestricted funds; negative balances |
Revenue Composition: Source Diversity & Transparency | Review audited financial statements for revenue breakdowns. Flag if revenue is heavily concentrated among a limited number of sources or if key revenue categories are missing or unclear. | Lack of revenue variety or disclosure gaps |
Top Donors: Funding Concentration Risk | Using grantee-provided data on their top 5 donors (with annual amounts for the past 3 years), assess for concentration risk. Flag if more than 50% of total revenue in any given year comes from a single donor. | More than 50% of total revenue from a single donor |
Restricted Funding Dependence | Review audited financial statements: (i) Net Assets: Net Assets with/without donor restrictions; (ii) Statement of Activities: Revenue with/without donor restrictions. | More than 75% of the organization’s total revenue is restricted. |
Legal & Contingent Liabilities | Review the audit footnotes for disclosed legal or contingent liabilities, flag vague or material risks, assess whether a dollar estimate is provided. | Litigation mentions; contingent payouts |
Operating Reserve Ratio | Unrestricted Liquid Net Assets / Average Monthly Expenses. Estimate average monthly expenses by dividing total annual expenses by 12. | Fewer than three months of reserves; |
Current Ratio | Current Assets / Current Liabilities | Current ratio below 1.0 (insufficient liquidity) |
Leverage Ratio | Total Liabilities / Total Assets | Leverage ratio above 0.5 (moderate to high financial leverage) |
Program Efficiency Ratio | Program Expenses / Total Expenses | Program expenses below 70% of total expenses |
Fundraising Efficiency Ratio | Contributions Raised / Fundraising Expenses | Fundraising efficiency ratio is below 1.0, indicating it costs more to raise funds than the amount received. |
Operating Budget Review | Confirm budget is provided with revenue sources listed; flag if missing, if revenue shifts are unexplained, or if expenses exceed revenue. | No operating budget provided; revenue sources not broken out by type; projected revenue departs significantly from past trends; or projected expenses exceed revenue, indicating a structural deficit. |
Board Financial Oversight | Governance documents require audit and there is a presence of a treasurer or finance committee, and audit committee. | Board lacks a designated treasurer, finance committee, or audit committee as outlined in governance documents. |
Finance Capacity | Review titles and qualifications of finance staff or contractors to assess if capacity matches the organization’s budget size and complexity. | Organization lacks dedicated or appropriately skilled finance, accounting, or bookkeeping personnel relative to its budget size or complexity. |
Purpose and Limitations
This is a fact-based administrative review, and not a financial opinion or compliance assessment. It is intended to flag observable risks that may warrant further evaluation. Paragon Philanthropy does not provide recommendations or financial conclusions. We are not a CPA or law firm, and this checklist does not constitute financial, legal, or tax advice. Funders are encouraged to review any flagged items in the context of their own policies, and to follow up with the grantee directly if additional information or clarification is needed.
Selected Clients
Greater Houston Community Foundation
The Rockefeller Foundation
Chicago Community Trust
Zoetis Foundation
Greater Kansas City Community Foundation
Marin Community Foundation
Douglas B. Marshall, Jr. Family Foundation
Rodan + Fields Prescription for Change Foundation
Whittier Trust
Communities Foundation of Texas