Internal Controls: Are You Keeping Your Church or Non-Profit Safe?

Internal controls are measures utilized by an organization to safeguard assets from waste, fraud, and inefficient use.

However, speaking as a church volunteer myself, most of us realize that internal controls not only protect the organization’s interests, but can also protect the staff members from false allegations.

Most volunteers and church staff members are good honest people and do not mind controls put into place that protect the organization's assets from theft or loss.

How do you set up a system of internal controls?

Because each church or nonprofit is unique and operates with its own set of unique circumstances, the financial leaders of each organization must design the system of internal controls to meet their specific needs.

Accountants have the knowledge and expertise to help churches and nonprofits implement these needed procedures.

Hopefully you have one in your organization you can trust. If not, you might want to consider hiring one, who is familiar with churches and/or nonprofits, if you are not comfortable with setting up a policy yourselves.

What are some internal control procedures?

There are three basic types of financial activities that are performed in a church or nonprofit. These are (1) authorization of transactions, (2) recording of transactions, and (3) custody of assets.

A lot of small churches and nonprofits have only one person handling all of their financial affairs.

However, you should try if at all possible, to use enough individuals to achieve proper segregation of these activities...for that person's sake as well as the organization.

See some suggested financial responsibilities for your staff.

For a church: The offerings should always be controlled by at least two non-related individuals. Members of the offering committee should rotate periodically...if possible.

They should fill out a Collection Count Summary and sign in ink to verify their accounting.

Then another individual is responsible for recording the contributions to each family’s contribution record and to the general ledger and then depositing the funds in the bank as soon as possible.

Thirdly, another unrelated individual who has not had any access to the funds should perform a bank reconciliation each month.

For a nonprofit: There are a wide range of internal controls. For example, you might have authorization lists about who can access which areas of the building, types of information, etc. Your business's mail should be opened by one person who logs in each check that is received. This person will be someone other than the person who deposits the checks to the bank.

Disbursements of large amounts, for example, over $500, may require a secondary signature, for example, from the board treasurer.

For both churches and nonprofits: Verify that all checks have been properly signed and that the bank balance reconciles to the bookkeeping records.

You should also verify that the beginning balance equals the ending balance of the previous month both in the checking account and the general ledger.

Another internal cash control procedure is...Establishing clear guidelines for the handling of your organization's funds.

If at all possible...a written financial procedures manual will help establish these guidelines.

A very important internal control procedure is...Conducting an annual financial audit.

The audit may be external (performed by an outside Certified Public Accountant) and/or internal (reviewed by business people in the organization who understand financial management).

And last but not least...Require two signatures on all checks.

Those writing and signing the checks have the responsibility of checking all invoices for accuracy before payment is made.

What are some proper processes for checks and deposits?

Check Writing

• Ideally there should be 3 people who can sign church checks in case of an emergency.
• The check stub, copy of the check or the check number should be attached to the authorization and documentation (receipts, etc.) and filed for auditing purposes.

Deposits

• All checks and cash that are received should be processed in a timely fashion with all checks stamped, “For Deposit Only”.
• Records must be kept so that retrieval of the items deposited can be verified in case there is a dispute over an item deposited.
• Develop a numbering system to match deposit slip with computer records.

The handling of church or nonprofit funds is an act of stewardship. So we should always do what we can to see that our organization's resources are properly managed and cared for.

Additional Resources

Zondervan 2010 Church and Nonprofit Tax and Financial Guide continues to be one of the few resources offering tax and financial advice to churches and nonprofit organizations.

Issues of financial accountability, receiving and maintaining tax-exempt status, accounting for charitable gifts, and other crucial topics receive careful and full discussion.

The 2010 edition also contains a thorough description of tax laws affecting churches and other nonprofit organizations, ensuring compliance with all regulations.

The book includes expert advice on handling charitable gifts, sample policies and procedures, easy techniques for simplifying financial policies and procedures, insights on medical expense reimbursements, key steps in sound compensation planning, and examples of required IRS filings.

For important protections against money mismanagement, read this article: Safeguard the Church Treasury.

For practical guidelines for screening volunteers, see this article: Safeguard Your Church.

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