Internal Cash Controls to Keep Your Church Safe

John B. Duncan, CPA, National Society of Accountan

NOTE FROM CHURCHCONSTRUCTION.COM EDITORS: If your church is planning to build, more than likely, more money will be coming into the offering. If you don`t have the right kind of cost controls and accounting procedures, you may be headed toward trouble. Before you start any new capital campaigns or fundraising, you may want to implement some of the suggestions from these qualified accountants...

Recently a Southern Baptist church in Mississippi discovered that a member/employee had embezzled more than $700,000 over a three-year
period. This church has about 1,100 resident members and an average
attendance of about 400 on Sunday mornings. This church`s undesignated
gifts during the embezzlement period ranged from $600,000 to $800,000
per year.

This means that for a three-year period, one trusted individual was able
to take about 33 percent of the church`s income without being detected.
The embezzlement occurred because of poor internal controls over cash
receipts.

Cases of fraud and embezzlement in churches and other nonprofit organizations are becoming more and more common. Most such cases could be prevented by the implementation of basic internal controls related to cash receipts. The church where the embezzlement occurred did not have an accountant in a leadership position. Many accountants serve on governing boards of their churches as church treasurers, or on church finance, audit, or counting committees. Because these accountants have training and expertise in the area of internal control, they are in a position to help their church and any other organization where they serve
prevent acts such an embezzlement or the misuse of funds.

Traditional definitions of internal control state that the system of internal control includes measures employed by an organization to safeguard assets from waste, fraud, and inefficient use. A system of internal control over cash receipts, therefore, should provide management with assurance that everything about cash receipts is functioning as it should.

Churches receive contributed resources from their members. This money is given to help carry on the work of the local church. Church leaders have a special fiduciary obligation to make certain that all church assets are protected and used properly. The concept of internal control is just as relevant to not-for-profit organizations as it is to profit-seeking organizations. A good internal control system can help volunteers avoid temptation to do something they should not do.

However, internal control can be a sensitive issue in churches and in any
organization that relies on volunteers. The church is built on the concepts of honesty, truthfulness, and mutual trust. Implying that staff members or
volunteer workers might be less than completely honest could cause problems.

Recent cases of fraud and embezzlement, however, should offer evidence that a good system of internal control is necessary in all organizations. Internal control weaknesses open the door for misappropriation of funds as well as waste and inefficiency. Systems of internal control in churches have traditionally been quite weak. It has been estimated that 15 percent of all churches have been, are being, or will be victimized by an unscrupulous employee or member. Because of the sensitivity of the issue, when implementing a new internal control system in a church, accountants should emphasize that controls protect an individual from false accusations. This "protection of the person" concept may be easier to
sell than the necessity for protection against theft.

An accountant who is aware of the typical internal control problems that exist in churches can become involved in his or her church`s accounting process and help this church avoid potential problems. The following sections report the results of a study conducted to determine the internal control procedures related to cash receipts that are commonly found in local churches.

Methodology of the Study
A study was conducted to determine the type of internal controls actually in place and functioning in church accounting systems. First a questionnaire was mailed to 1,200 churches in three major Protestant denominations in the southern United States. The questionnaire asked whether basic internal controls were actually in place and operating. A total of 317 useable responses was received for an overall response rate of 26.42 percent. For purposes of analysis, churches were classified as either large or small.

The mean membership for churches in the denominations included in the study was about 309 members. A large church was, therefore, defined as one with more than 300 members. A small church was defined as one with 300 or fewer members. The random sample was stratified so that an equal number of surveys were mailed to "large" and "small" churches.

From the information gathered, a model was developed to describe typical internal control systems for weekly offerings. If more than 50 percent of the responding churches had a particular control in place, that control was included in the model. If less than 50 percent of churches had a particular control in place, that control was not included in the model. . . Typical internal control systems in small churches were weaker than in large churches.

After developing the model of a typical system for weekly offerings, recommended internal control models for weekly offerings were developed. . . The following section describes typical systems for weekly offerings in large and small churches.

Typical Cash Receipts for Weekly Offerings
Most large churches have a counting committee that counts the offerings
and prepares a collection report, including a list of all checks received. Offerings are controlled by at least two individuals and cash is safeguarded in a safe or lock box while at the church. The counting committee verifies that the amount written on the offering envelopes matches the contents of the envelopes and all checks are restrictively endorsed. The counting committee prepares a duplicate deposit slip and takes all cash receipts and the deposit slip to the bank. The collection
report, the list of checks, and the second part of the deposit slip are forwarded to the financial secretary.

The financial secretary is responsible for posting amounts to the contribution records of individuals. The financial secretary also prepares journal entries and posts these amounts to the general ledger. The collection report, deposit slip, list of checks, and offering envelopes are all filed by date. The bank statement typically is mailed to the church office. The financial secretary prepares the monthly bank reconciliation using the monthly bank statement, deposit slips, collection reports, and lists of checks received. The bank reconciliation is also filed by date.

Most small churches have controls related to cash receipts for weekly offerings that are very similar to those of large churches. However, the majority of small churches do not have an offering counting committee and cash is not safeguarded at all times. In addition, small churches typically do not have a paid financial secretary. A volunteer, usually the treasurer, performs the bookkeeping duties and prepares the monthly bank reconciliation.

A Model of Suggested Internal Controls for Cash Receipts of Weekly Offerings
This section contains suggestions for improvements in existing systems of internal control at both large and small churches. Most of the suggestions involve an increase of separation of duties or a better paper trail. . . . Small churches typically lacked several basic controls that were generally found in large churches.

All churches should have a functioning audit committee that will be involved with many of the suggested improvements. Churches should utilize a counting committee to count the weekly offerings and make the subsequent deposit. The offerings should always be controlled by at least two individuals and members of the offering committee should rotate periodically. . . .

The offering counting committee should prepare two copies of the list of checks received and three copies of the collection report. A copy of each of these documents should go immediately to the financial secretary (or assistant treasurer) and the audit committee. The financial secretary needs a copy of these documents to make necessary entries into the accounting records, and the audit committee will need a copy for subsequent audit purposes. The third copy of the collection report should be attached to the church`s copy of the deposit slip. In addition, cash always should be safeguarded. All cash receipts should be deposited in the bank as soon as possible.

Small churches need to divide the work currently performed by the church treasurer. An assistant treasurer should perform the duties that a paid financial secretary typically performs in larger churches. The treasurer`s duties should be limited to disbursing cash and serving as a check signer.

Many recent acts of embezzlement in churches and other non-profit organizations have taken place because the same individual prepared checks for signature, mailed the checks, and performed the monthly bank reconciliation. In such a situation, the bank statement should not be mailed to the organization`s office. Instead, it should be sent to a member of the audit committee who will be responsible for preparing the monthly bank reconciliation. Copies of the weekly collection reports, deposit slips, and lists of checks received will be available to this audit committee member.

Conclusions
Churches included in this study had several controls in place related to cash receipts; however, most church indicated that they lacked elementary controls prescribed in the accounting literature. Large churches tended to have more control procedures in place, but all of the churches in this study could improve their existing internal control systems.

One of the fundamental elements of internal control is separation of duties. Large churches generally have larger staffs and are better able to utilize full-time workers to segregate responsibilities. Small churches often need to utilize volunteers to accomplish proper separation of duties. There are three basic types of financial activities that are performed in a church. These are (1) authorization of transactions, (2) recording of transactions, and (3) custody of assets. Churches should use enough individuals to achieve proper segregation of these activities.

It is important to specify the responsibilities of employees and volunteers involved in receiving cash. Individuals often think that the more they do, the more they "help out" or "serve the Lord." This attitude can lead to a lack of separation of duties. In addition, errors are more likely to occur when individuals attempt to perform a task with which they are unfamiliar. Volunteers also need proper training and supervision to be effective.

Although leaders of churches and other non-profit organizations may wish to believe that their members are honest and worthy of complete trust, the numerous examples of improprieties cannot be ignored. Although a strong system of internal control may cause an inconvenience from time to time, the existence of such a system should prove to be well worth the effort in the long run. Accountants have the knowledge and expertise to help churches implement these needed internal control procedures.