Financial Controls

Controls Over Income

Problems:

God has an interest in church finances and we must, too. In both the Old and New Testaments there are several principles of church finance that will dispose of any reluctance to make this statement of God. Jesus said a great deal about money. Of the thirty-eight parables that Jesus gave us in the New Testament, twelve of them are about money (Dollar, 1974, p.11). Unfortunately, embezzlement and misappropriation of funds are not only part of the secular world, but are also part of the realities confronting today's churches. The protection of assets is a basic requirement of all business and church organizations. Few churches have paid much attention to internal controls. That may be because so many of those who handle church funds are volunteers. "Sound internal controls are imperative. Not only to protect the church from the weak and tempted, but also for good management and stewardship," (Heyd, 1984, p.46). As a consequence of weak internal controls, approximately 52,000 churches or 15% of all churches will become victimized by people who will wrongfully convert church property in their trust to their personal use (Vargo, "The Church Treasurer Alert" July 1995). Most of those who are involved with this type of misappropriation of funds will attempt to justify themselves in the crime. Many have the intention of paying back the funds. Good intentions do not justify the crime. Although some may feel that they are owed the funds, the wrong does not make the right. Often the churches themselves are not blameless for the misappropriation of funds. Of the millions of dollars handled yearly by churches, most is handled in a casual way. In many cases the misappropriation may never be discovered (Vargo, "The Church Treasurer Alert", 1995) .

Procedures:

A wise church board will protect its workers from suspicion by others with a sound policy of internal controls. These internal controls will also remove the temptation from the innocent church worker. Churches can avoid the risk of damage by carrying out sound internal controls. It is often devastating to church to have to share the bad news about a co-worker who has misappropriated funds. Even the stature of church leaders can be damaged when funds are not handled properly. This is not say that honest errors cannot happen. These errors account for a number of significant losses in the churches' financial records. More than one church bookkeeper has inherited a set of records and concluded that because there were so many errors, nothing can be done to make the books balance. "Furthermore, some church accountants use unusual accounting procedures that particularly invite errors. Although you cannot design a perfect system that detects and prevents all errors, various features can be built into the system to minimize errors (Vargo, "The Church Guide to Internal Controls, p.6).

Documenting Cash Receipts

The more attention church leaders give to putting all cash-handling procedures into writing and to having a periodic review of internal controls the fewer the problems that are likely to evolve from weak internal controls. In most churches the primary source of revenue is through donations by cash or by check. Without exception, all cash received should be documented very carefully. This documentation should include pre-numbered envelopes and a corresponding offering tally sheet. Once the offering is taken up and brought to the office, counters should verify the amount on the check with the amount on the envelope. The amount recorded on the envelope should be recorded on a permanent church contribution record. New I.R.S. regulations require that those who give more than $250. 00 in one gift must receive a written receipt from the church for that gift. Counting procedures must be clear and complete. All donations must be properly account for and classified as to the nature and purpose of the gift. All funds should go through the counting process. This would also include funds received in the mail. Donations should be deposited as soon possible after the counting process is complete and recorded. Once the counting process is completed, the men who counted the offering should sign an offering tally sheet. This tally sheet summarizes the contributions and totals the designated gifts into categories of general budget, missions budget, or restricted gifts and unrestricted gifts. Ideally the best procedure after the count is complete is to place the offering into a locking bank deposit bag. One usher will have the key to the locked bag, while two other ushers will take the secured bag to the bank where it will be recounted by two tellers and verified by a deposit receipt. This deposit receipt should later be compared to the signed offering tally where it will be stapled together. When a night deposit box is not available, some churches will keep the contributions in a steel safe until it can be deposited. Regardless, the deposit should be made as soon as possible after the collection is taken-up.

Division of Duties

There must always be a clear division of duties when handling the cash for a church. Never should there be only one person in custody of the offering. The person who has the combinations to the safe should not have the key to the locked bag. It does not take much imagination to guess what may happen when only one person has access to loose coins and bills. The temptation is ever present to slip a few coins out of the offering when no one will ever notice it. When two people are in charge of the offering the chance of misappropriation is minimized. The wrongful accusation of a person suspicious of taking funds is reduced. The same person should not be assigned the sole responsibility of counting the offering, recording the offering, writing the checks, reconciling the banks statements, and issuing financial reports to the church. This separation is important to reduce the opportunity for misappropriation. When an individual has the responsibility of more than one function involving cash, misappropriation becomes almost impossible to detect and false entries can be made into the records. It is a good idea to rotate the counters of the offering funds. This procedure will minimize the possibility that records might be falsified or another set of records kept.

Depositing the Funds

All funds should be properly deposited as soon after they are received. Occasionally, some churches, especially those with large cash balances, will hold the offering in their safe for several days or weeks until it is convenient for someone to deliver the monies to the bank to be deposited. Regularly the offering tally sheet should be compared to the date and amount on the church's deposit ticket. The chairman of the counting committee should weekly verify that funds have been deposited in the correct account and that it was deposited on a timely basis. The purpose of this internal control is to prevent any misappropriation of money after it has been received and that accurate records may be kept on a timely basis. Some churches may have a mid-week service in which a small amount of money is received. If it is impossible for these funds to be deposited then safeguards should be included to assure that the offering is not easily spent. This may include stamping each contribution check with the phrase, "for deposit only to the account of #123-45-6789" as soon as a it is received. Checks that are properly endorsed prevent the opportunity of a check to be converted for personal use. All funds received in mid-week services or by mail should be delivered to the counting committee and deposited at the earliest possible date. Never should payment for services be made from the cash in the offering nor should individuals be allowed to cash personal checks through the offering cash. This will prevent someone from illegally claiming a check was a tax deductible donation. All bills should be paid by check so that an accurate deposit can be kept intact. When adequate controls are followed it will be difficult for anyone to wrongfully convert cash or other church assets for their personal use.

Posting the Contributions:

Offering envelopes can be an especially useful tool for posting contributions to an individual's donors records. Some pastors prefer to monitor individual giving records so that they may monitor an individual's commitment to the local church. An offering envelope system can readily record such information. Members should be encouraged to use offering envelopes to provide an accurate record of their gifts for tax-deductible income tax purposes. Statistical information and giving patterns may be needed to project future income. The use of offering envelopes can be a very effective tool for this purpose as well as an internal control feature. The sum total of the offering envelopes can easily be compared to the total offering that was deposited. The envelope can provide a convenient source document as to determine if a gift is restricted for a specially designated project or unrestricted for the general budget.

Restricted Gifts

When a restricted gift is received the donor has created a fiduciary trust for the church. A church can never use a restricted gift for other than the purpose of which the restricted gift was given without the express consent from the one who has created the fiduciary trust. A church vote cannot move mission fund monies to a general budget category.

Unrestricted gifts

Unrestricted gifts should only be used for the churches general fund budget. Whatever the nature of the gift the offering envelope is useful to record and protect the gift that was made. All church members should be encouraged to use the envelope system and to give the contributions via checks. "Used offering envelopes should be retained by the church treasurer in the same manner that other paid invoices are kept." (Vargo, The Church Guide to Internal Controls, 1995, p.29). These documents should be held by the church for a minimum of five years before being discarded. In order to confirm contributions a giving statement should be sent out regularly to all contributors on a quarterly basis, but never less than on an annual basis. It is a good idea to acknowledge special memorial donations in the church bulletin and for the minister to send a special thank you letter to the donor.