Financial Internal Controls in a Not-For-Profit World
Atlas of Giving™ reported in their “U.S. charitable giving: 2013 results & initial 2014 forecast” that total charitable giving to religious organizations totaled $143.40B in 2013. This figure includes all religious organizations and does not specifically identify the total annual contributions to only Christian churches. Whatever the actual annual contributions to Christian churches were; it is certain that every dollar received by the local Christian church represents a financial sacrifice by those who support it. In this article I am going to discuss some essential financial controls that will help to safeguard the assets of a local church and provide assurance to your congregation and outside donors that their sacrifice is valued, protected and will be applied to fund Kingdom growth.
Many times I see ministries that do not utilize an accounting software program to account for the assets of the ministry and to track income and expenses. This can be pose a serious issue since the person responsible for creating and maintaining the financial statements typically will create their own financial statement format that can be cumbersome and difficult to understand. Using a standardized format for financial statements are essential so that decision makers and those outside the organization such as; lenders and CPA’s will be able to understand the financial condition of the ministry through the financial reports provided. In most cases; relatively inexpensive accounting programs like Intuit QuickBooks would be adequate for the needs of a church to accurately create and maintain financial reports.
Utilizing an experienced bookkeeper to maintain the church financial statements is another essential internal financial control that should be implemented by every local church. This person can be a volunteer if necessary, but he/she must have a good understanding of finance and the unique accounting practices that are required for not-for-profit organizations such as churches. The standardized financial statements that are prepared through an accounting software by an experienced bookkeeper should be provided to the board of trustees and/or finance committee on a monthly or quarterly basis. This practice provides decision makers of the ministry with up-to-date financial data that will allow them to adjust the annual budget accordingly and/or reallocate funds to necessary ministries or operational needs.
The preparation and review of accurate financial statements provides a layer of financial accountability that ministries should strive for; however there are additional steps that should be taken. For instance; utilizing a certified public accountant to provide an annual audit or review helps create an additional level of accountability that is necessary to ensure that the financial condition of the ministry is a core focus of ministry leadership and accurately presented. The CPA will certify your financial statements as being true and accurate (within a margin of error) and will conduct an analysis of the financial procedures currently in place within your ministry in order to help identify potential weaknesses and suggest improvements that increase financial accountability and transparency.
Financial accountability doesn’t just take place on the board or senior leadership level; but also within the frontline staff level. An important financial control that should be utilized by ministries is the process of how funds are received, counted and recorded in addition to how expenses are paid. A primary factor to consider regarding ministry expenses are how they are paid – specifically who has the ability to incur an expense and who has the ability to pay a liability. Here is a simple process that can save your ministry heart-ache; every expense above a certain threshold ($250 for instance) should be pre-approved by the necessary senior level of leadership (finance administrator, senior pastor, executive pastor, etc.). Also; checks should always be signed by two signers, of which one is a senior level leader – ensuring that the two signers are not be related to one another by blood or marriage to help create appropriate segregation of duties. When credit cards are utilized by staff to make ministry purchase; monthly expense reports should be submitted to the appropriate level of management and approval should be given before being paid by the ministry.
The Sunday tithe represents that largest income stream for many churches; so the collection, processing and recording of the Sunday tithe should be handled in a manner that is consistent with demonstrating the highest possible level of financial integrity. The key to financial controls associated with the Sunday tithe is segregation of duties – that is to say that no one person has too much combined authority or responsibility when it comes to counting, depositing and recording the tithe. A minimum of three people should be utilized in the collection and processing of the Sunday tithe – two counters and one person observing the count and double counting to ensure accuracy. A tremendous amount of trust is put into the people who will physically handle the Sunday tithe and other revenues; so the ministry should conduct adequate background checks to confirm the credibility of those charged with handling the tithe. The counting process should take place in an area that is separate from the main traffic areas to reduce the introduction of others into the secure area in which the physical count is taking place.
Once the physical count is complete; the tithe should be secured in lock bags, a safe or other secure location until deposited at the bank. Please note that all cash should be deposited and not kept on site or used to pay expenses to ensure a record of the tithe received – all cash received should be deposited. I have seen ministries keep cash received through tithes after internally recording the income only use it to pay expenses such as musician salaries or other miscellaneous expenses. This practice can pose a serious issue since the revenue is unable to be confirmed through third party documents such bank statements. Therefore that income will be disallowed by those outside your organization (such as a CPA or potential lender) due to the lack of the ability to confirm all income – resulting in under reporting of ministry income. The tithe should be deposited at the bank by a different person than the original three who were involved in the physical count and then the deposit slip should be given directly to the treasurer/bookkeeper to be entered into the accounting software.
I know that the process of counting and processing the Sunday tithe seems tedious and utilizes multiple volunteers/staff members; however this process should be handled in a manner that represents that highest level of accountability in order to ensure that no mishandling of funds take place. This process – in addition to the other financial controls that that have been discussed in this article – are suggested “best practices” that ministries should have in place to create an environment of financial integrity. These help to provide your congregation and other donors with the highest possible level of assurance that their financial sacrifices are treated with respect and valued by your ministry.
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