INTERNAL CONTROLS AND FINANCIAL OVERSIGHT

Aren't we all good people?

            Over the past several years there have been numerous newsworthy events in which directors and managers of companies or not-for-profit organizations have been taken to task for failure to conduct the financial affairs of the organization soundly or responsibly.  Some have gone into bankruptcy.  This has given rise to serious revision of accounting rules and practices.  Churches are not immune either to the new standards or to the expectation of increased scrutiny in the future.  What are some of these expectations? 

             First, every church should have financial policies and procedures, conflict of interest policies and “whistle blower” policies to which it adheres.  The objective of such policies is to assure good operating practices while preserving independent review of all activity.  A relatively new notion for churches to consider, “whistle blower protection” allows individual members to voice a concern about something the minister or the treasurer is doing financially in an effective venue and not face ostracism.     

             Every church, especially a larger one, should have a financial oversight committee  which is entirely separate from the finance committee in membership.  The job of the oversight committee is to periodically assure that expense transactions are recorded and authorized, that all income is accounted for, and that assets are safeguarded, including being insured as appropriate.  A CPA is licensed to perform an audit or review.  It is possible however for a financial oversight team to develop procedures to review such issues if a professional audit cannot be conducted every year.  When a congregation is too small to effectively have an independent oversight group a congregation can “trade” an annual review with a neighboring church.  (It is not necessary that it be in the same denomination!)  There is an example of an oversight procedure in Appendix 15.

             Finally, church treasurers need to focus on internal controls.  The term "internal controls" refers to the rules and processes we establish to ensure that the organization's money and property do not get lost, stolen, or misused.  We do not install internal controls thinking at the outset that the people in our midst are embezzlers.  We are a volunteer organization, however; and we have people who feel overworked and unappreciated, and who sometimes make errors.  With any of us in such situations at 10:00 pm, dull faculties, anger, or other natural conditions of life can descend and lead us to wrong solutions to the problem at hand.  Internal controls help to avoid the compounding of misunderstandings and errors.  And sadly, it is also true that churches are among the prime targets of those who seek to embezzle precisely because church internal controls are notoriously lax.

             Let's remind ourselves that any checks within a system will have flaws, will not catch everything.  Unhappily, your church might hire a skilled bookkeeper whose primary intent is to fortify his or her income in an unauthorized way.  A congregation will probably not do enough to detect this until after a large amount of money is gone.  On the other hand, there are some fairly simple things that can be done to obtain 98% reliability against errors and misunderstandings, as well as making overt fraud much more difficult and early detection more likely.^[1]  As in all systems, the closer you get to perfection the greater is the cost of the effort involved.

             The first rule is to not ask one person to do all the work.  This seems pretty clear, yet is frequently ignored.  I do not know whether UU congregations are typical in this regard, but there are not many in our midst that really enjoy keeping track of money and details.  When we find someone with these tendencies, it is easy to load that individual with responsibility for the entire effort.  "Burn out" is not the only reason to avoid this temptation.

             So, two or three people take on some of the responsibility.  Should they just "form a committee" and go do it?  No!  The second rule is to keep a clear delineation between financial tasks.  Having two or three people sharing overlapping responsibilities throughout the financial system doesn't get us where we want to be.  We'll look at specific ways to break down the financial management tasks below.  Let's simply note the importance of not allowing overlapping responsibilities.  Even temporary "filling in" (during vacations, for example) by the same person who ordinarily is restricted from particular duties should be avoided if possible. 

             An example will make this clear.  Many churches now use accounting software.  All such reputable software has password protection built in.  This means that the person who posts the payment transactions can be prevented from having the ability to make other entries to the books except from within the specific parameters of their function.  ^[2]

              If someone goes on vacation you would not then pass out their password to all the other users of the system, would you?  Rather, you might see this opportunity to train a new backup person for that particular task during the vacation.  The same principle applies whether or not you are using software.  In this way you can preserve the separation of the functions, and also begin the process of recruiting and training replacement volunteers.  Structure the problem as one of organizing the finance committee, which has three operating responsibilities. 

 1)         Taking in money and depositing it.  This can be a small group, at least two, who count and deposit money from stewardship receipts and the Sunday cash collections, collect rent, and establish value and issue receipts for donated items.  These individuals can post transactions to the books.

 2)         Approving expenses and writing checks. 

           a.         Every expense reimbursement must be approved by someone other than the check signer prior to the check being written.  The finance committee must maintain a list of specific individuals who can authorize expenses  (for example, staff members, ministers, committee chairs, and board members).  Every expense needs to have a voucher which has both an approval signature and an indication of where it is to be charged in the budget.^[3] 

           b.         There should be two or three authorized check signers.  The check signers are not expense authorizers.  With both an expense authorizer and a different check signer every expense is reviewed and approved by two people even though the check has only a single signature.  The check signers are the individuals who enter expense transactions on the books.  It is best if the minister is an authorizer, not a signer.

3)         Preparing and reconciling all reports and financial communications.  This important function must be carried out independently of the others.  In smaller societies it can be done by a single individual who is uninvolved in the other two activities, but it is easier to have more than one person.

a.         An independent reconciliation of the monthly bank statements provides a check on the entry of both deposits and of expenses. 

b.         All stewardship reports to members should be prepared by other than those who record receipts; this provides a check on recording payments to appropriate individual records.  This function might involve a small group who also do the in-person contact with members who fall behind.

c.         Ideally the Treasurer should prepare reports of budget status to all committees, the board, and the congregation but is not directly involved in either recording receipts or expenses.