Internal control

How to save your church from a financial scandal.

Mack Tennyson, CPA, Ph.D., is assistant professor at the College of Charleston, Charleston, South Carolina.

red's main problem is money. His creditors are always at his heels. Fred s lifelong ambition was to become a pastor.

After graduation from seminary he was hired as the minister of a small country church.

As he moved into the parsonage, Fred exclaimed, "God is really blessing me. I don't have to worry about my creditors now. I'll pay them off and never be bothered by those Philistines again." Less than a year later Fred was fired because he was caught stealing money from the church.

What went wrong? Did Fred's halo slip? Did the church make a mistake when they hired him? Sin is sin, and there is never an excuse for it. But if the church had behaved more responsibly, Fred would never have been put into the situation that led to his downfall.

After Fred moved out of the parson age, I talked to him about what had happened. He explained, "I was making more money than I ever had; I also spent more. Pretty soon I was in the worst mess of my whole life. Every week I was given the money from the offering to give to the treasurer. I began to borrow a little—I really intended to pay it back. I was finally caught when one of the members walked into the office and saw me putting the money into my pocket." Fred accepts full responsibility for his actions. But the whole situation could have been avoided if the church had had good internal control in its financial system. "Internal control" is fancy accounting jargon for a system of checks and balances to prevent stealing. A good internal control system accomplishes several things. First, it reduces the risk of the church's assets being stolen without the loss being detected.

Some Christians respond to the sug gestion that we need to protect the church's assets with such statements as "Why do we need to worry about God's money? He can protect it." While I would not deny God's ability, I would respond that God gives us brains and expects us to use common sense. We don't leave the church doors unlocked.

We don't allow just anyone to be church treasurer.

The second thing accomplished by an internal control system is the removal of unnecessary temptation. It makes steal ing a difficult process. It prevents unauthorized "borrowing." The church is a sanctuary, and should not be allowed to become a source of temptation for those who handle the offerings.

Third, a good internal control system improves the accuracy of the financial records. As the treasurer reviews the books, he or she will discover mistakes and make corrections where the records are wrong. A good internal control system gives the treasurer the satisfaction of knowing that everything has been handled properly.

Finally, a good internal control system protects the treasurer from false accusa tions and brings with it a good deal of peace of mind.

A good internal control system does not need to be complex. You see a simple example of internal control every time you go to a grocery store. The cash register that rings up your groceries produces a tape for you and one for the manager. If the system is run properly, the cashier does not have access to the manager's copy of the tape. At the end of the day the manager compares the tape to the cash in the drawer.

This simple little process of keeping a record of transactions in a way that the one controlling the assets cannot tamper with achieves the four goals of internal control we discussed above: 1. It tells the manager whether the cashier is stealing from the store. 2. It prevents the cashier from working under undue temptation. 3. It helps the recordkeeping by giving the manager an accurate record of the sales. 4. It gives the cashier peace of mind to know that the manager cannot make false accusations.

How does this work in the church treasury setting? The process is divided into two sections—internal control over cash receipts and internal control over cash payments.

Internal control over cash receipts Establishing internal control over cash received is very important. Many people give their offerings to the church in cash, either in an envelope or as loose offerings. The church needs a system to ensure that all cash is handled properly.

To establish internal control over cash the church board should appoint a treasurer and a helper. This helper is the controller of the cash. The helper is not the assistant treasurer. That is, if the treasurer is going on vacation, he needs to find someone other than the helper to take over the treasurer's duties. Like wise, if the helper is going on vacation, he needs to find someone other than the treasurer to take over the helper's duties.

A good helper has the following qualifications: 1. Dependability—he or she is frequently in church and responsi ble enough to find a substitute when necessary. 2. The helper is able to add and subtract. The person who keeps a fairly neat personal checkbook makes an ideal helper. In general, the helper keeps the^hurch's checkbook, while the trea surer does the bookkeeping.

Suppose Trish is appointed the church treasurer and Harold is appointed the helper. They should handle offerings as follows: As soon as the worship service is over, Harold and one of the deacons take the offering into a back room and count the loose offerings. They may also want to check all envelopes for cash and reconcile the amount inside with the figure written on the envelope. This can obviate nasty his-word-against-mine disputes over whether or not money was actually in an envelope. Opening enve lopes may not be regarded as necessary in some situations, but it is an extra precaution.

The deacon makes a note of the amount of cash offerings and later gives it to Trish, the treasurer. Harold takes the loose offering and puts it into an offering envelope. At home he makes a list naming each of the people who gave a contribution and the amount they gave.

One of the names on the list is "loose offerings." He then totals the list and prepares a deposit slip. The total on the list, the amount on the deposit slip, and the total of the cash and checks on hand must all agree.

Harold's next duty is to deposit the money in the bank and give Trish a copy of the donor list and the bank deposit receipt. Trish checks to make sure that the total of the list and the bank deposit receipt are the same. Harold keeps copies of the list and receipt for himself and gives Trish the offering envelopes, since they tell which fund to put the money in.

Trish now records the money received into the journal just as if she had received the money directly. She also prepares the receipts to the contributors, using the list that Harold gave her, and compares the amount listed as loose offerings to the amount on the slip the deacon gave her.

With this system no individual can secretly steal. The deacon is watched by Harold. Trish never touches any money.

The only one with access to the money is Harold. Harold, of course, could take the money and run off. But he would have a very difficult time sneaking out any money. If he steals some and lies about the loose offerings, the number would not match the amount reported to Trish by the deacon. If he steals and lies about a contribution from a member, the receipts Trish prepares and gives to the members would show the lower amount.

The member then would raise a question about the difference. If he told the truth on the list but just didn't deposit the full amount, the bank receipt would not match his list, and Trish would question the discrepancy.

If Trish had to do everything herself, she could steal the money and falsify records without ever being caught. With a good internal control system, the money handler can't steal without the records revealing it. And the recordkeeper can't steal, because he or she never touches the money.

Internal control over cash payments The internal control over cash pay ments is even simpler than control over cash receipts. The first rule for estab lishing control is that all claims for payment must be given to the treasurer in written form. Most of the written claims are bills, such as the electric bill or the water bill. But some are requests for money from the pastor or a member.

If the youth leader wants to be reimbursed for the money he spent on a teen campout, he scribbles out a note asking for the money and describing what fund it is to come from. The treasurer then decides if reimbursement is proper. All payments of money are initiated by a written request describing the reason for the request, which fund is to be charged, and to whom it is to be paid. This written request is very useful later if someone questions the propriety of a certain payment, or even if the treasurer simply forgets why a payment was made.

On a routine basis, say twice a month, Trish develops a list of all the people who deserve checks. She gives a copy of the list along with any bills that need to be paid to Harold.

Harold reviews the list to ensure that each of the payments is reasonable. He does not concern himself with whether the board approved the payment; that is Trish's responsibility. He simply looks for improper payments by Trish—such things as payment of her electric bill or checks written to her mother.

After his quick review, Harold writes the checks to the people who deserve them, jots down the check number on the list that Trish gave him, and then gives the list back to Trish.

Trish keeps track of the balance in the bank; Harold's responsibility is to follow her directions as far as they are proper.

But Trish remains responsible for keep ing the bank account in balance. She does not deal directly with the bank.

Harold makes all of the deposits and writes all of the checks. In fact, Trish, the treasurer, does not even need check signing privileges. Likewise, Harold is not permitted to touch the accounting records.

Without a two-person system, Trish could write checks to herself and never be caught. But with the two-person system, Trish would have a difficult time .stealing the money since she doesn't touch it. And since Harold doesn't touch the records, any unauthorized checks written by Harold would show up when Trish prepared the bank reconciliation.

Establishing internal controls may seem to create extra work at first. But putting forth the effort now may prevent a scandal in the future.

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Mack Tennyson, CPA, Ph.D., is assistant professor at the College of Charleston, Charleston, South Carolina.

May 1987

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