Good internal controls are essential for churches to thrive in today’s financial landscape. Implementing and adhering to written internal controls can boost your ministry’s operational efficiency, establish reliability, and enhance integrity. Here are a few helpful tips from the Financial Services experts at UMC Support!
Why do internal controls matter?
Firstly, let’s discuss the purpose of good internal controls. These methods and policies are designed to:
Minimize & detect errors
Prevent & detect fraud
Promote operating efficiency
Achieve compliance with established policies
Provide reliability and integrity of information
Safeguard assets
The 2008 General Conference added to paragraph 258 of the Book of Discipline, item c the responsibility of establishing written financial policies to document the internal controls of the local church. Therefore, if you don’t currently have a written policy, you will need one as soon as possible, regardless of how big or small your congregation or budget is! All these financial policies and procedures should be approved by your church’s Finance Committee so that everyone is aware of them and in agreement.
What are the main internal controls?
The four internal controls we will discuss include:
Separation of Duties: No one person should be responsible for more than one related function.
Transaction Validation: Occurs when one person verifies the validity of a transaction being handled by another person
Records Retention: The accurate documentation of all financial transactions that will support historical and future reporting
Supervision: The overseeing of all operations, policy, and procedures
In order to establish internal controls, keep these tips in mind:
Understand its role in each process
Identify who is responsible
Apply the most protection in the riskiest areas
Communicate the process in writing and with training
Designate supervisors who will monitor the process
What are the key financial areas of internal control?
The four key areas of internal control are:
Collections / Cash Receipts
Accounts Payable / Disbursements
Account Reconciliation
Reporting & Review
Let’s explore each of the areas to unlock your ministry’s success!
Area 1: Offering / Cash Receipts
Good internal control begins at the collection plate!
After the offering has been taken, it is received by the Counting team, which should consist of two or more persons - unrelated to each other – who are neither the Treasurer nor the Financial Secretary.
Offering totals need to then be given to the Financial Secretary to count details and record the deposit.
A second copy needs to be given to the Treasurer. Be sure to deposit on the same or next business day.
The Financial Secretary’s deposit log ought to be reviewed by the Treasurer and compared to both the bank statement/activity and a copy of offering totals prepared by the Counting team.
Such a review should be weekly for good control. This helps to minimize and detect errors and prevent and detect fraud. For a visual representation of how offering and cash receipts should be handled, view our handy roadmap here.
Area 2: Accounts Payable / Disbursements
Accounts Payable is the management of monies being disbursed.
To prevent and detect fraud, vendors and suppliers need to be set up by someone other than the person entering invoices and/or cutting checks.
Invoices must be required for all payments and approved by someone other than the Financial Secretary or Treasurer. This person should be authorized by the church’s Finance Committee.
Checks are cut only after invoices are properly approved and authorized.
Requiring two signatures and/or reviews of all checks also improves internal controls.
These controls help to achieve compliance with established policies, provide reliability and integrity of information, and safeguard assets.
Area 3: Account Reconciliation
Account Reconciliation is a period-end review of all credits and debits. It is an important process for maintaining financial integrity, ensuring accuracy, and that spending is aligned to the mission and budget.
All balance sheet accounts and reconciliations need to be reconciled at least monthly by someone other than the preparer.
Bank accounts ideally would be reconciled at least weekly after deposits are made.
Someone other than the treasurer or the financial secretary should review bank reconciliations quarterly or at least bi-annually.
This will promote operational efficiency, provide reliability and integrity of information, and safeguard assets.
Area 4: Reporting & Review
Your church treasurer should prepare financial reports monthly, comparing actual financial activity to both the current year and the prior year’s budget. There need to be explanations for significant changes in both budgets, and reports ought to be provided to the Finance Committee.
Annual audits must be conducted within one month of the church’s fiscal year. Audit reports should be submitted to the Audit and Finance Committees and Charge Conference. When financial leadership changes or concerns arise, the finance committee will determine the best course of action.
Members of the audit committee should be appointed by the finance committee. These members must be unrelated to anyone involved in the financial processes or record keeping of the church. CPAs, bankers, and bookkeepers are preferred candidates to serve on the audit committee.
A Records Retention Policy should be adopted by the Finance Committee and be in line with IRS recordkeeping recommendations. The policy should identify types of records to retain, a cool, dry place for storing, how long records should be kept, and how to properly destroy them.
This promotes operational efficiency, achieves compliance with established policies, provides reliability and integrity of information, and safeguards assets.
Segregation of Duties is a MUST!
Segregation of Duties is the most critical control! It helps to achieve all five goals of good internal control. Here are a few tips to effectively segregate duties:
The Counting Team cannot be related to or part of a household with each other, the Treasurer, or the Financial Secretary.
The Treasurer and Financial Secretary must also not be related to or part of the same household.
Those who approve invoices ought to be Persons designated by the Finance Committee, and invoices should not come from the Treasurer or Financial Secretary.
New Supplier creation needs to be from someone other than the person entering invoices.
Bank reconciliations should be prepared by the Financial Secretary and reviewed by the Treasurer. A 3rd party designated by the Finance Committee ought to review them quarterly.
Other Good Practices
Vacations should be required for all employees, and their duties reassigned to others in their absence. Duties shouldn’t wait until they return (i.e. deposits, payments, etc.)
It’s best if petty cash is minimized or eliminated. Establish procedures and establish a maximum amount that may be used at one time. All uses should be supported by invoices with proper approval.
Surprise count/reconciliation of petty cash should be conducted.
Your church needs to perform routine criminal/financial background checks on all persons handling money or recording financial transactions.
Lastly, if something looks strange…. Question it! You are a steward of your church’s money. Be vigilant and curious. A church’s finances should be able to withstand transparency and scrutiny from anyone, including its own members!
UMC Support is committed to providing ministries with quality services and support while adhering to our mandate to ensure that funds given to the Church are used appropriately and efficiently. For assistance in establishing or improving internal controls, or for support with other financial matters, contact us today at ConnectionalRelations@GCFA.org!
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