Churches are built on trust, but when it comes to finances, trust alone isn’t enough. Implementing strong internal controls is essential to protect your church’s resources, maintain donor confidence, and ensure compliance with legal and ethical standards.
In this guide, we’ll explore common vulnerabilities, 5 essential internal controls every church should implement, and practical steps to prevent fraud in your church’s financial operations.
Why Internal Controls Matter in Churches
According to a nationwide survey by Church Law & Tax, nearly one-third of churches have experienced some form of financial misconduct. The study emphasizes that “the primary types of financial misconduct that occurred are the most preventable with a good internal control structure.”
Implementing internal controls helps:
- Prevent fraud and embezzlement
- Ensure accurate financial reporting
- Maintain donor trust and confidence
- Comply with legal and tax obligations
Common Financial Vulnerabilities in Churches
Churches often face unique challenges that can make them susceptible to financial fraud:
- High-trust environments: A culture of trust may lead to lax oversight.
- Limited staff: Small churches may rely on a few individuals for multiple financial tasks.
- Lack of formal policies: Absence of documented procedures increases risk.
- Inadequate segregation of duties: Allowing one person to handle all aspects of a financial transaction.
Nathan Salsbery, a forensic accountant, notes that “fraud is a serious issue in many churches,” and emphasizes the need for effective internal controls. Church Law & Tax
Key Internal Controls to Implement
There are 5 essential internal controls every church should implement:
1. Segregation of Duties
Divide financial responsibilities among different individuals to reduce the risk of error or fraud. For example:
- Counting offerings: At least two unrelated individuals should count cash and checks.
- Deposits: A separate person should make bank deposits.
- Record-keeping: Another individual should record transactions in the accounting system.
GuideStone provides a helpful Segregation of Duties Checklist to assist churches in implementing this control.
2. Regular Bank Reconciliations
Reconcile bank statements monthly, and have someone not involved in cash handling perform the reconciliation. This practice helps detect discrepancies and unauthorized transactions promptly.
3. Authorization and Approval Processes
Establish clear policies for approving expenses, writing checks, and accessing funds. Require multiple signatures for large disbursements and maintain documentation for all approvals.
4. Secure Cash Handling Procedures
Implement procedures for collecting, counting, and depositing cash offerings:
- Use lockable collection boxes
- Limit access to cash storage areas
- Deposit funds promptly
5. Conduct Regular Audits
Perform internal audits periodically to assess compliance with financial policies and identify areas for improvement. Consider engaging external auditors for an independent review.
Training and Education
Educate staff and volunteers on financial policies and the importance of internal controls.
Church Law & Tax offers resources and courses, such as Safeguarding Your Church’s Finances, to help churches strengthen their financial practices.
ECFA also has tons of great free resources to use their standards for financial transparency and ministry integrity.
Conclusion
Establishing strong internal controls is not just about preventing fraud … it’s about stewarding the resources entrusted to your church with transparency and integrity. By implementing these practices, you can protect your church’s finances, uphold donor trust, and focus on your mission.
Need help putting some of these in place?
At Overflow Accounting, we can help create personalized internal controls for your church and help be part of the solution!
Hiring us as your outsourced accounting firm will instantly segregate the financial data entry and reconciliations duties. We utilize the best financial technology for churches to help create efficient and simple approval processes and built in security and internal audits for your finances.
