Protecting God's Property

Seven Basic Internal Control Procedures

By: Dave A. Petteway

April 7, 2003

Introduction

            In the Parable of the Talents in Matthew 25:14-30, Jesus gives instruction on our responsibility to be fruitful with the property God entrusts to us.  We can only be fruitful if we have first taken the necessary steps to protect what He has given us.  In reward for fruitfulness and trustworthiness, we know that the servants with the five and two talents were granted greater responsibility, and entry into the joy of the Lord.  Then we have the servant who buried his one talent and was cursed for his slothfulness, having his stewardship taken away and being cast into outer darkness. 

            We can potentially find ourselves with such an indictment as the servant with one talent if we fail to take even the most fundamental steps to insure the availability and fruitfulness of God’s property in our ministry.  Properly taking such steps is known as establishing internal controls.  These are policies and procedures that should exist within our church to protect cash, equipment, supplies, and other valuable assets. 

           Unfortunately in most churches the internal control of assets has been weak.  As a consequence about 15% of all churches have been, are being, or will be victimized by an unscrupulous employee or member.  In most situations the problem has been people pocketing cash.  This is not surprising because churches receive significant amounts of cash, and all to often its gets handled in a very casual manner.   

            Generally speaking, internal control discussions are not very popular within many of our churches.  We prefer to think of fellow leaders and members as both competent and honest.  Then, we may become even more comfortable if “That’s never happened here” can be stated.  By the way, the correct statement is “We’ve never found out that it’s happened here.”  Obviously “finding out” means it’s too late, God’s property has been taken and our stewardship is now in question.

            Internal controls are about prevention.  About taking reasonable steps to preclude abuse.  They are not perfect as given sufficient time and dishonesty among multiple people virtually any control can be defeated, but that is not the everyday situation.  My aim in this abbreviated treatment is to focus on a minimum set of procedures as a starting point.  Seven basic areas that need to be promptly evaluated and strengthened if found to not be functioning effectively.  The Basic 7 are: 1) Cash Receipts; 2) Cash Disbursements; 3) Bank Statements; 4) Monthly Financial Reports; 5) Credit Cards; 6) Petty Cash and Separate Bank Accounts; 7) Supplies and Equipment.  After the Basic 7, evaluation and strengthening should continue to incorporate the full panel of internal control procedures, particularly periodic independent reviews and /or audits.

           Good internal control planning is not reserved for the accountants and the financially astute only.  I believe that once it begins, the church will develop an appetite to make internal control considerations a continuing part of their ministry as God increases His provision.

The Basic 7 Recommendations for Internal Controls (in Selected Areas)

1) Cash Receipts---remember there’s safety in numbers.

          A minimum of two unrelated leaders (have back-up here) of at least two years of service within the ministry, with excellent attendance, to be responsible for all cash receipts.  It should be mandatory to maintain a log of amounts contributed by cash denominations and checks recorded on each giving opportunity.  Both parties must sign-off based on visual agreement with the counting process. 

           Ideally, you want to keep the funds intact, then complete the deposit processing and secure the money in a bank pouch for immediate drop-off at the bank lock-box (make such an arrangement with your bank). But, if it is a necessary practice to cash checks or to make cash disbursements (both are generally a bad idea), then both parties must oversee the process and record the transactions indicating to whom, and how much.  When completed, the deposit preparation proceeds with both parties in agreement with all that has transpired.

Take note for further reference:

• Member giving records should be accurately maintained for tax purposes.
• If checks are cashed, avoid accidental (or intentional) recording of giving credit.
• If the pastor is involved at all, it should not be in handling or recording the funds.
• Secure and monitor the location where funds are taken.
• Alter the deposit routine as to person(s) and route but not timing.

2) Cash Disbursements ---remember there’s safety in numbers.

           Again, there must be two signatures of unrelated parties for checks to be valid.  One party will typically be responsible for handling preparation of all disbursement checks.  It is best if that party does not sign the checks, but they must never be the only signature required.  A meeting with the final check signer(s) occurs for review of the checks and related invoices if applicable.  Final signatures are applied after consensus is obtained.  The participation of a third non-signing attendee and/or the pastor is even better.    

Take note for further reference:

• There should always be at least two unrelated parties that can validate the legitimacy of any invoice where services were ordered and rendered before
• paying.  A written sign-off is best.
• There should always be at least two unrelated parties that can validate the legitimacy of any invoice where items were ordered and received.  They should know that the items are in use or useable before paying.  A written sign-off is best.
• Always know the payment status of payroll taxes.  Avoid delinquencies.
• At least two parties should review and agree on the computation of the payroll and the handling of mandatory and voluntary deductions.
• Consider utilizing a small Finance Committee of committed (to the Lord) members to perform the steps in 1) and 2) above.  They do not have to be financial experts to learn to do them well.                  

3) Bank Statements---know the balance.

           This is one of the most important internal control steps that is most often ignored.  A party, other than the check preparer (pastor is OK if uninvolved elsewhere) should be the recipient of the unopened bank statement.  It is that party’s responsibility to examine the cancelled checks (have them returned, it’s worth it) and be knowledgeable, or ask questions about what has been paid.  The bank statement is then forwarded to the party that will prepare the monthly financial report for reconciliation with the bank statement (see 4. below).  Find a skilled party for this or inquire at your bank about receiving reconciling assistance --it is vital.

Take note for further reference

• A monthly bank reconciliation must be prepared for every bank account.

4) Monthly Financial Reports---substance over form.

           If bookkeeping talent is unavailable, decide what you need to know and record it by income and expense descriptions.  Then subtract total expense from total income and compute your net income or loss for the period.  I recommend that you utilize a cash basis, which means you only record income when you receive it, and expense when you pay it.  As a result, your monthly financial statements will show a net amount that can be easily verified by your bank statements if prepared for the same calendar period (talk to the Bank about getting an end-of-the-month cut-off).  Make this comparison mandatory and discuss it when meeting on the financial statements.  Or, get an uninvolved senior church leader and/or the pastor to independently verify the comparison.

5) Credit Cards---“Don’t do it!”

           The answer is don’t do it.  Credit cards invite abuse and “cover-ups” that don’t belong in our churches.  I’ll stop just short of calling them the work of the enemy, but for church leaders they can be devastating.  For full-time clergy working with inaccessible financial personnel, the convenience is obvious, but the horror stories can fill volumes. One of the roles of a Finance Committee is to work with clergy to orderly define and address such needs without taking a really “quick and dirty” option. 

6) Petty Cash/Separate Bank Accounts---be very careful.

           Often times the way 5) above gets addressed is to provide the pastor with a petty cash fund or a separate bank account.  While risky, they can work acceptably if the parties follow sound practices.  First, the term imprest basis must be explained.  This is an approach that pre-sets a limit such as $100 for a fund.  At any time, the total amount of items disbursed (e.g. $75) plus cash remaining (e.g. $25) must equal $100.  The fund is periodically replenished by reimbursement of only the items disbursed ($75).  A review and approval process should occur before reimbursement.  If unacceptable expenditures are noted, then personal reimbursement by the applicable party(s) can be required to fully restore the fund.  Either petty cash or a separate bank account should be on an imprest basis.

           This methodology is generally accepted for addressing fairly nominal or emergency needs within the church budget.  What is not acceptable is to borrow for personal needs or to circumvent the church budget or its expenditure policies. 

           The account limit should be set to approximate no more than a one-month need based on experience.  The smaller the better should be the “rule of thumb.”

7) Supplies and Equipment---use, not abuse.

           The essential point here is to use them for the purposes intended by the church, not as a matter of personal accommodation to anyone.  Valuable equipment that is portable, such as laptop computers, should be clearly identified as belonging to the church and records carefully maintained (you’ll need them for property tax exemption filings).

           Also very important to remember, there is no benefit in permitting well-intentioned members to believe it is acceptable to bring supplies or anything else from their employers to help the church.  While not an internal control issue per se, it certainly is an integrity of ministry issue.

Conclusion

            If I have piqued your interest in this vitally important area of ministry, then let me reiterate, it only begins here.  Please do not stop with just the Basic 7 recommendations because as your church grows, internal controls must grow too.  Please make ample use of other informational sources on the subject via the bookstore, library and the internet.          

           If you have now recognized the wisdom of enacting these recommendations, then please refer this document to your Finance Committee or the parties that have been involved in these functions for further discussion and implementation where necessary. 

            I also recognize that this may be perceived as a lack of trust and/or confidence in the parties that have been faithfully and competently performing these tasks.  This is often the number one (1) reason that good internal controls are not implemented.  Using our faith and taking no action is often more convenient, but we know that faith without works is dead (James 2:20).  I encourage you to seek Godly wisdom and guidance in your situation.  The scripture discussed in the Introduction can be an effective teaching tool in helping to de-personalize the message.

           Remember, Protecting God’s Property is a blessed charge we have to keep!

References:

Bergstrom, Richard L., Gary Fenton, and Wayne A. Pohl.  Mastering Church Finances.  Portland: Multnomah Press, 1992.

Tennyson, Mack.  Church Finances for People Who Count.  Grand Rapids: Zondervan, 1990.

Vargo, Richard J.  Effective Church Accounting.  San Francisco: Harpers and Row, 1989.

Vargo, Richard J.  The Church Guide to Internal Controls.  Matthews, NC: Christian Ministry Resources, 1995.