Internal Financial Controls and Risk Management

Internal Financial Controls and Risk Management

Unfortunately, churches are not immune to the actions of unscrupulous people, even staff and volunteers.  Indeed, because churches want to operate in an atmosphere of mutual trust, they can be especially vulnerable if they fail to establish sound internal financial controls. Internal financial controls are sets of risk management tools, procedures and protocols designed to safeguard the church’s assets, ensure accurate financial reporting and efficient and effective use of funds.  In addition, internal controls serve to protect staff and volunteers from false allegations of embezzlement or misuse of funds.

Internal financial controls should be set forth in your church’s Financial Operating Procedures (FOPs) which describe how you will handle each of these issues.  This will provide guidance to staff, board, and volunteers and is especially important as turnover occurs and new people take on new roles.  Financial Operating Procedures can be as detailed and comprehensive as the circumstances of your church require.  

Seperation of Duties

Separation of duties not only plays a critical role in safeguarding church assets and protecting staff and volunteers, but also reduces the workload of the church Treasurer.  Dividing duties among a number of people ensures that no one person has the opportunity for or gives the appearance of improper conduct.   

Duties are often separated by receiving and disbursement functions. For example, the individual who receives and records contributions should not handle disbursements or prepare checks.   A different way to think of separation of duties is to separate recording and reporting functions from cash handling functions.

 Large churches often have paid staff - a financial secretary or administrative assistant, for example - who posts contributions to individual giving records, posts receipts to the General Ledger, and performs the monthly bank reconciliation, but does not handle disbursements - this would typically fall to the Treasurer. Smaller churches often do not have the resources for paid staff to handle this function and must rely on the Treasurer and volunteers, preferably in the form of an Assistant Treasurer, who is assigned specific tasks, as set forth in the FOP’s. 

Physically Safeguarding Cash Receipts

The primary purpose of internal controls is to protect contributions from members and other contributors.  This begins with appropriate procedures for collecting and counting funds during church services and other events, as well as any received by mail.

Collections

Collections, during the worship service or other events should always be in the custody of at least two un-related individuals.  This means that the offering should be handed directly over to counters or placed in a secure, locked location until they can be retrieved by at least two people responsible for counting.  Checks received by mail should likewise be secured until they can be counted. 

Counting

Counting should occur as soon after collection as possible and should be performed by two un-related individuals who are, ideally, part of a counting committee that rotates responsibility frequently.  Many churches also take the additional step of requiring the presence of a Board member during counting.  Counting should occur in a secure, locked location, where there is no “traffic” or interruption.

Deposits should be made immediately following counting whenever possible and should be made by two people. When it is not possible to deposit receipts immediately, they should be secured, preferably in a safe or lock box.  Cash receipts should NEVER be kept in an automobile or in someone’s home.

Recording Cash Receipts

Accurate accounting of member contributions and other receipts begins with counters.  Counters should:

·        Use a ‘count sheet’ to record individual contributions, the purpose of the contribution, check number (or indicate cash) and to tally totals.

·        Make sure the amount written on envelopes matches the amount inside the envelope.

·        Endorse all checks ‘for deposit only’ to the church’s bank account.

·        Double-check each other’s work. 

·        Ensure that the count sheet totals agree with the deposit slip.

·        Sign or initial the count sheet and the deposit slip

·        Deposit the collection intact; that is, without “making change” or disbursing cash to cover expenditures.

·        Provide a copy of the count sheet and deposit slip to the person responsible for posting contributions to individual giving records and to the general ledger.

Checks received via mail should be endorsed “for deposit only” to the church’s account and held in a secure location until they can be counted and recorded. 

Recording of receipts should be handled by a financial secretary, assistant treasurer or volunteer not involved in handling cash or making disbursements. 

The Assistant Treasurer should:

·        Receive a copy of the count sheet and deposit slip from counters.

·        Post totals to General Ledger.

·        Ensure that totals on the count sheet and deposit slip match totals posted to General Ledger.

·        Post contributions to individual giving records.

·        Retain count sheets and deposit slips in a secure file.

·        Perform bank reconciliation each month.

Disbursements

Church FOP’s should designate who has authority to authorize and approve disbursements, the process for obtaining approval, and how and by whom they are recorded.  Approval of expenditures is often delegated according to the level of expenditure.  For example, larger expenditures may require approval by the Board of Directors, while expenditures below a certain level might be approved by the Pastor or another staff member.  A blanket approval is often in effect for budgeted operational expenses such as mortgage/rent, utilities and the like.  The task of scrutinizing disbursements for proper documentation and approvals and preparing checks for signature, and recording transactions often falls to the Treasurer or another designated individual who does not handle receipt of funds.

Disbursements should:

·        Be documented via disbursement or check request form accompanied by original invoices and any other necessary documentation or justification, as well as the signature of the approving official. 

·        Be paid by serially numbered checks rather than cash;

·        Always be signed by two authorized signers who carefully inspect the request and documentation.

·        Be promptly posted to the General Ledger and should depict date, payee, amount, purpose, and check number.

·        Include notation of the check number on the documentation.

·       Documentation should be retained in secure file.

About Check Writing

Church Financial Operating Procedures should include specific protocol regarding signature authority, check writing, and safeguarding checks.  Specifically, these protocols should:

·        Require two signatures on every check.

·        Identify who is authorized to sign checks.

·        Prohibit the person who prepares the checks from signing checks.

·        Ensure that bank signature cards are updated as signature authority changes.

·        Prohibit signing blank checks.

·        Prohibit checks made to “cash.”

·       Provide for physically securing blank, unused checks.

Additional Security Concerns

·        Is the location where financial records are stored locked when not in use?

·         Is access to this location restricted to authorized individuals?

·        Is access to individual giving records restricted to authorized individuals?

·        Are credit card receipts or other documents containing sensitive financial information secured properly?

Audit  

An important part of ensuring that your internal financial controls are followed and provide effective protection is an annual audit by an external auditor and/or internal audit committee.  See Audits Resource for more information on audits.