INTERNAL CONTROLS - Churchcpa

Belinda Whitfield, CPA a few quick tips for keeping track of non-profit expenses for new ministries.

Video Transcript:

Tracking Financial Transactions for New Ministries

Okay. As you’re working through this 501C3 process or process of starting a nonprofit organization, one of the things you want to think about is that you’re going to have to keep track of your financial transactions.

Okay, if you’re a new organization, this is going to be kind of easy. All you can do is probably start off with a little journal to keep up with that. But, eventually, understand your organization is going to grow.

Be prepared. As you grow or get further down the line, be prepared to put some processes in place and look at choosing an accounting program to keep up with your income and expenses. That’s going to make things a lot easier for you than trying to do things in a journal or on Excel. Initially, you’re okay with just keeping up with those transactions.

Also, be sure to keep your receipts. Get organized and keep all of that paperwork together and in order.

That’s my accounting tip for today. Be sure to subscribe to my channel and have a blessed day.

Thank you so much for your question. Submit your questions on my website at https://churchcpa.com/contact-us/

Let’s now turn our attention to the systems of internal control that would be need when dealing with money placed at the altar. This usually occurs when the church hosts special services for say missions or relief efforts. The reason for the offering does not mean that proper counting and recording should be ignored. On the contrary, documented internal controls procedures are quite relevant if the church is to protect its reputation and possibly the members’ lives. You really do not want it known that any member is allowed to leave the church with the offering in their possession.

The controls governing the collection of offering will apply which include:

That there is separation of the duties surrounding the collection, counting, recording and depositing of the altar offerings. Different persons should be responsible for each area.
That the principle of two is always followed. This means that at least two ushers should collect and count the offerings and the collections should at no time be left with just one person. Again it is emphasised that there should always be two people with the offering at all times.
The count and collection teams should be rotated regularly and the same two persons should not be paired together all the time.
At least two persons should accompany the collections to the area for it to be counted.
Ushers and counters should be rotated regularly.
The counters of the offering should be unrelated.
All collections should always be counted and deposited intact. Basically, it is not allowed for anyone to use any of the money collected whether to make change or for church expenses.

Here’s how it should work.

The ushers are responsible for taking up the collection placed at the altar.
The money is accumulated, collected and also submitted to the accounting team so that it can properly be counted.
At least two adults who are not related should be involved in the collection process.
Immediately after the service, the ushers are to retrieve the offering and take it to the prearranged secure area (on church grounds) to be counted or stored away until the counting can be made.
If the count cannot be done immediately, the collection should be placed in a locked safe in an area that has controlled access (little or no through traffic) on the church grounds.
Where the count is done immediately and there is a need to submit the proceeds to a recipient, say the guest speaker, the total recorded as placed at the altar should be deposited intact and a check for the same amount given to the minister.

The church is built on the concepts of trust, truthfulness and honesty and most members do realize that internal controls serve to safeguard the church’s interest while at the same time protect them against any possible false allegations.

The church should do everything in its power to safeguard its reputation by putting measures in place to prevent any appearance of impropriety. These controls will also serve to preserve the integrity and safety of the members since they help to remove temptation and provide structure and established guidelines as to how accounting for church finances should be done.

Every church will from time to time invite another minister speak at their service or function. Very often a special offering is taken from those in attendance at the meeting and it is announced that these proceeds will be donated to the guest speaker. Care must be taken in handling these contributions and the internal control measures that need to be in place will include a number of the procedures already discussed.

To begin with, the overarching internal controls procedure -separation of responsibilities- need to be in effect. This means, the collecting, counting, recording and bookkeeper functions must each be carried out by separate individuals or groups. Also the best practice procedures regarding the appointment, training and scheduling of ushers still need to be followed.

Collecting

The church may or may not have pre-printed envelopes for the service. Where they do, these envelopes as well as cash and/or check contributions should be collected together at one time.
The collection should be done separate from the normal church collection, perhaps at the end of the service or just before the guest speaker addresses the church.
Where funds as placed at the altar, the ushers collect and accumulate it for submission to the counting team.
No less than two ushers should be with the money at all times. At no time should the offering be left in the possession of just one person.
Note carefully. The collection for the guest speaker should not be mixed with the regular collections at any time.

Counting

The procedures for the delivering of offering to be counted must be followed.

At the end the service, the ushers deliver the offering it to the designated secure area (on church grounds) to be counted or stored away until the counting can be made.
If it not possible to do the count immediately, then the collection should be placed in a locked safe in an area that has limited access to individuals, on the church grounds.

Recording and Bookkeeping

The persons who do the counting will follow the procedures and guidelines set out and the recording is done.

Where checks were submitted, copies of the checks and envelopes are made.
The adding machine tapes are prepared for currency, coins and checks and are initialled by at least two members.
The deposit ticket is prepared and duplicate made.
The deposit is then locked away in the bank deposit bag.

Where the counting is done immediately at the end of the service in order to allow for a payment to the guest speaker, the amount recorded as received for the special offering is still deposited intact and check for that total is prepared and given to the guest speaker.

By following the above in a very practical way, the church is ensuring that there can be no hint of misconduct in how they handle the finances entrusted to them.

Internal controls need to be in place for managing the collection, counting offerings for worship services and Sunday School. Do remember that these procedures or control measures are to safeguard the integrity of all involved and are not directed at any individual.

The simplest and possibly easiest internal control to understand and implement is that of dual or shared custody. As with the collecting of offering for regular church service the collecting of offerings requires the following internal controls to be in place:

Two persons should be collecting the money and keeping track of it at all times. This control measure is easy to relate to, understand and implement.
These two persons should together take the money to the counting team for counting and deposit.
The ushers should be reminded not make change from the offering collected. The petty cash system should be followed where someone needs change.

The counting team will follow the internal control guidelines set out below.

Make sure that the counting area is secure

The count area should have no distractions and no “through traffic” that would allow access to a bathroom, supply closet or individuals other than the counters. A limit should be set as to the number of people (other than counters) that are in the room. The only people in the room should be the counters, person overseeing the count, and maybe someone from the church staff.

Counting Supplies

Before the count begins, make sure that all the count supplies are in place, namely, collection worksheets, Bank Deposit Tickets, Tape calculator, and bank deposit bags.

Counting the offering

The offering is counted, sorted and recorded by alternate count team members. These separate duties may be rotated among count team members. The entire collection is deposited. No cash is to be retained for Sunday school incidentals.
Where contributions are by way of checks, the checks should be photocopied as well as any offering envelopes.
Separate the cash by denomination. Count and band them. Make sure that the amount and the counters’ initials are written on the band. The second counter should open the band, do the recount, and record their initials on the band.
Do two different adding machine tapes to confirm the checks total, and two adding machine tapes to confirm the coin and currency total.
The count sheet is then completed by the counters documenting currency, coin, and checks. Write on the adding machine which is cash and which is check, initial and date it. The collection worksheet will have one copy of the tape is attached, inclusive of date and the counter’s initials. This provides a level of accountability.
It is now the counter’s duty to record the checks and currency on a duplicate bank deposit ticket with all information on the original ticket. The original bank deposit ticket, including the adding machine tape is sent to the bank and the copy kept by the church.

As you set up your systems for managing your church finances, you’ll find that when your procedures are documented and followed, your ushers and counting team will be empowered to serve with confidence.

We are on to another area of systems of internal controls for managing church finances. Let’s focus now on the collecting offerings. This function is carried out by the ushers. Before we go into the details, it is important that church leaders, wanting to put procedures in place or make improvements to current procedures point out that it is not because of any suspicions of wrong doings within the ministry. It is essentially to safeguard the integrity of the ushers, counters and bookkeepers involved in handling the church finances.

The use and documentation of internal controls affecting the collection of offerings will serve at least three purposes. First, the integrity of the custodians of cash is protected from unwarranted suspicion by having formal established procedures. Second, by having these procedures documented donors can be assured of the transparency, security, stewardship and secrecy maintained regarding contributions. Thirdly and quite surprising to some, the offering collection and count procedures are modelled from scriptures.

Two (2) people should be with the money at all times.

This principle was followed by the apostle Paul (I Corinthians 16.3, 4). He was insistent that someone go with him if he were to agree to take the offering from the church to the saints in Jerusalem. Another example can be found in II Chronicles 24.11 “The king’s scribe and the high priest’s officer came and emptied the (offerings) chest, and took it, and carried it to his place again”. Two persons were with money at all times. Take a look at verse 14 of the same chapter and you will see that when the work on the house of God was finished “they” took the unused funds to the king.

This the biblical basis for making sure that two people are with the money at all times, but the very practical reason is that it makes sense to remove any and all temptations to misappropriate money from the offering before it is counted. The ushers’ integrity is protected and the church shows its commitment to honesty and integrity in board conduct.

In managing the church finances this principle of shared custody should be followed without variation.

Rotate your ushers.

This is a rather practical and often easy to implement internal control measure. It reduces the opportunity for familiarity or predictability. You also do not want the responsibility of ushering to become a burden for the church members. To this end:

Be sure to maintain a schedule of who will be ushering when. Be sure to include any special ministry services.
You should not have the same two persons paired together all the time. As much as possible, rotate who they are paired with.
The ushers working together should be unrelated.
Do not assign the same two ushers to do the same services back to back. Let others share in the experience and this will boost morale especially where the services are high profile.

These are internal control measures that have biblical foundations and common sense value that church leaders can relate to and easily implement.

Choose Ushers Wisely – Here are tips on screening, selecting and training ushers on handling money.

Your ushers are at the heart of the internal controls necessary in setting up your systems for managing your church finances. They will be the first ones handling the money.

Seriously, not just anyone can be an usher. In the same way that not just anyone can teach a Sunday school class or sing in the choir. Having the right ability, gifts and passion matters a whole lot. When choosing new ushers the things to keep in mind are the spiritual qualities and characteristics that usher should have and do take care to involve the Pastor or Ministry Team Leader in the selection process.

Spiritual Qualities of an Usher

What comes to mind are the fruits of the spirit found in Galatians 5:22-23. The objective here is not about obtaining perfection but establishing that the desire to live a spirit-filled life is the basis for choosing to serve as an usher. While all the fruits of the spirit referred to are important, those mentioned below need particular mention.

Faithfulness – If you are faithful as a Christian you will be faithful as an usher.
Gentleness – It is a mark of maturity when an usher never throws around his or her authority. The humble usher who seeks to put others first despite how pressuring the situation is, is the best usher to have.
Self-Control – The usher who cannot exercise self control will not be able to control a large crowd. It is in the midst of hectic moments and last minute changes that the usher’s self control is tested.

Personal Characteristics of an Usher

Now, the usher plays a vital role in church ministry and it is essential that they understand this. As such the usher should be someone who enjoys and care about people, possess the heart of a servant and is committed to the vision of the church. They need also to be supportive of the church’s leadership.

Training

It is just good sense that ushers be trained to carry out their functions, especially when it comes to the handling of the money. The specifics such as how much area each usher is to handle, which two ushers are to accompany the money for counting, the actual procedures for taking the money to the location for counting and other details need to be laid out and known by all involved.

Here are some general but practical guidelines that the church can modify or adopt as good practices. The usher should:

Maintain good personal hygiene and proper appearance.
Be on time every time. To help to achieve they should show up
- Leaders should arrive at least 30 minutes before the service
- Other ushers should arrive at least 20 minutes before the service

Wear a name tag.
When required to serve, give it full and total attention to serving.
Call the leader of the church or group if you are on the schedule and can’t make it.

These are matters that would be covered at training to which all ushers should be mandated to attend before they are allowed to serve.

In looking at systems of internal control needed in the handling of church finances, we need to examine the control measures needed during the actual collection other of the offerings. In particular the spotlight is now on what happens when someone wants change from a large bill.

Remember, internal controls and procedures are not about a lack of trust in the people doing the tasks but these controls actually serve to protect them from wrongful accusations and is a practical, tangible deterrent to fraud. So let us look at what should and should not happen when some requires change.

The Petty Cash system

Requiring change is a normal, recurring situation so a practical and effective internal control to implement is the operation of a petty cash system.

The custodian of the cash would be the head usher who would be provided with say $100 worth of change in small currencies of ones, fives and tens. The break out of small change is what the experienced head usher thinks will work. By the way, the petty cash is for Sundays only.
Ideally, at the end the service or perhaps at the end of the day, the petty cash is handed over to the accounting team who will lock it away until the next week.
Regular checks should be made to have the large bills changed out and to confirm that it always amounts to the amount set aside.
Always make sure that everyone is aware of how much the petty cash the usher has.

The Offering Envelope

Internal control best practice is for all donations collected by the ushers to be delivered intact (as collected) to the counting team. If the usher opens an offering envelope to make change for a member this is considered to be tampering.

Let’s be real. If this practice is allowed (opening the envelope to make change) the church will open itself up to a lot of complications and scrutiny. Here is the picture that is painted by this behaviour.

Multiple envelopes will be opened until the change is found because it is highly unlikely that the usher will find the correct change needed from the first envelope opened.
The information on the outside of the envelope will not match the funds on the inside.
The counting team will not be able to verify how much contribution was made by the donors whose envelopes were opened.
Donors and members statements will not be properly updated because the amounts could not be verified.
Funds may be misplaced or misappropriated during the search for the right denominations and
There can be no assurance that all the offerings collected were actually submitted to be counted.

Tampering with envelopes, because this is what it amounts to regardless of the usher’s good intentions, does nothing to protect the integrity of the ushers from unwarranted suspicion and the donors will not have the confidence that good stewardship is being practiced with the funds collected. The internal control put in place by the church is to have this action totally banned. That is, it’s against church policy for the ushers to open any offering envelope.

Let’s look at how we can set-up church accounting guidelines for handling of the church finances. In the accounting world we refer to this as internal controls. One very common and easy to understand step is to have what is sometimes called a division of responsibilities. We often hear the term “Segregation of Duties”, it’s the same thing.

A rather simple structure for segregating duties calls for ushers to collect the offerings, a counting team to counts the money, a bookkeeper records the offerings in the accounting system and the data entry person records the offerings in the church management database. This ensures that the same person is not responsible for ALL matters relating to managing the church’s finances. The discussion below will help you to understand and appreciate some basic internal controls and how they work for you.

Segregation of Duties for Handling Cash Receipts

There are a number of activities involved here, namely, collecting the funds, counting it, making deposits and updating the accounting records. I want to begin at the collection point, that is, with the ushers.

A simple and very effective control is to ensure that there are sufficient ushers, based on the size of your church, so that the same usher is not doing collections every week. Also, ensure that the ushers are trained in how to handle the funds collect and in particular not to open envelopes to make change for other members. You can appreciate that they may not get the right change that is needed from the first envelope and that the amount written on the outside of the envelope will not correspond when the accounting is to be done.
Another simple, but very important, internal control measure is to ensure that you have no less than two persons with the funds at all times after it is collected and while it is being taken to the accounting team for counting. Just a reminder, all funds whether cash left at the altar, funds deposited in a basket or submitted in an envelope, must be collected and submitted to the accounting team. This also includes any special offering for a guest speaker. You really leave the church exposed to undue censure where anyone is allowed to walk away from your ministry with money in a bag.
An internal control that has global acceptance is that funds collected should be deposited in-tact. What this really means is that all of the offering collected should be deposited into the bank in the same way is collected with nothing removed or added. Where there is a need to submit funds to the minister you deposit the funds, in-tact, and write a check to the minister for the total amount that was collected. This way, the funds are properly accounted for and the contributors’ statements get updated. Notice that the procedure is easy to follow and clear for all to see.

Sunday School Offerings

The person who is in charge of the Sunday School should ensure that at least two persons are responsible for collecting and counting the Sunday School offering. In many churches, where it is not possible to have the two-person team, bank deposit bags have provided the internal control necessary for this area. How this works is that the bank provides the bank deposit bags with two keys, the offering is placed in the bag, the bag is then locked and the key given to the Sunday School leader. The accounting team will have the other key to open the bag to do the recording and deposit.

This issue has focused on the collections aspect and you will notice that these internal control measures are practical, easy to implement, affects many areas of ministry and yet safeguard the integrity of accounting for church finances. The counting, bookkeeping and recording areas all have different internal control measures which will be looked at later.