Governance and Internal Control Recommendations for Churches

Posted on Wednesday, October 25, 2023

Organizations considered to be churches do not have to file for tax-exemption with the IRS. They are automatically considered tax-exempt without filing. In addition, churches are exempt from filing an annual Form 990 with the IRS. However just because churches are exempt from certain filing requirements, this does not mean that they are exempt from having proper governance and internal controls in place.

Often times churches rely heavily on volunteers that may not be knowledgeable of nonprofit policies and procedures. It is also not uncommon for church employees to be unfamiliar with how church financial operations should be structured.

In order to improve your church's governance and controls, consider implementing the following:

Governance

Mission statement. The Church should have a clearly articulated mission statement approved by the board. It should also be regularly reviewed by the board.
Bylaws. The bylaws should include requirements for the characteristics of the board members and officers and the number of governing board members.
Number of voting members of the board. The State of Indiana requires a minimum of 3 board members but the size will vary on the Church. Small boards risk not having the required skills and resources. Large boards risk not being able to have effective discussions and make decisions.
Number of meetings of the board. The board should meet often enough to conduct business and fulfill its duties. It’s typical for boards to meet every month (excluding July and December), every other month, or quarterly.
Documenting board and committee meetings. The State of Indiana requires written board minutes for all meetings. In addition, written minutes should be maintained for committee meetings where significant decisions are made.
Compensation of CEO, executive director, officers, and key employees. The IRS requires the review and approval of top management’s compensation by an independent committee. As part of the review, comparability data should be used and the decision should be documented.
Independent board members. The IRS believes that boards should include independent members that should not be dominated by individuals related through family or business relationships.
Conflict of interest policy. Board members should act in the best interest of the Church rather than their personal interest. It is important for the Church to have a conflict of interest policy in place to address potential conflicts involving directors, trustees, officers, and key employees.
Code of ethics policy. The Church should adopt a code of ethics that describes behavior it wants to encourage and behavior it wants to discourage. The policy should be communicated to all persons associated with the Church.
Whistleblower policy. A whistleblower policy describes the process for handling complaints and establishing procedures for employee to report in confidence any suspected fraud or misuse of the Church’s funds. The policy should be communicated to all persons associated with the Church.
Financial oversight. The board of directors are ultimately responsible for the Church, including its financials. It is important that the board regularly review the Church’s financial statements and understand what they mean.
Audit or review. Some churches receive a financial audit or review by an independent CPA. If the Church does have either performed, the board of directors should be involved with the process from approving the auditor to review of the final report.

General Controls

Segregate duties
No blank checks signed in advance
Regular reconciliation and review of bank accounts
Approval of invoices prior to payment
Limited use of credit cards
No debit cards
Oversight of financial reporting by the board/finance committee

Controls Over Offerings

Adopt policies
Consider bonding employees/volunteers who handle cash
A minimum of 2 people should always collect and count offerings
Encourage the use of offering envelopes
Count the offering as soon as possible
Use a secure area for counting
Use count sheets
Use restrictive endorsement for checks (“for deposit only”)
Verify amounts shown on the envelopes with contents
Properly identify restricted funds
Store offerings in a secure location
Deposit all offerings intact

Contributed by: Carrie Minnich, MAcct, CPA | Partner | DWD CPAs & Advisors

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.