Five reasons you need effective internal controls.
Church leaders should be familiar with the "fraud triangle"—the factors that typically contribute to a fraudulent activity: incentive, rationalization, opportunity.
The first two—incentive and rationalization—really can't be controlled by church leaders. An incentive, such as debt or unexpected medical bills, and the corresponding rationalization ("I'll just take a loan and repay it," or "I deserve to get paid more so this money should be mine") are on the individual.
But what church leaders can control is the third corner of that fraud triangle—opportunity. By focusing our efforts here, we can do a lot to prevent fraud.
The best way to address the opportunity for fraud is to establish strong internal controls. I often hear church leaders say that they trust their leaders and staff. Of course they do. If they didn't, they wouldn't be on staff! I tell them two things other church leaders have told me: "Trust isn't an internal control" and: "Fear of getting caught is an internal control." By establishing strong internal controls, we can deter someone contemplating committing an act of fraud—either because of incentive or rationalization—from acting at all.
While internal controls sound intimidating, they can safeguard your church in the following five ways:
1. Internal controls protect employees. With supervisors approving staff expense reports, and a board or finance committee member approving your pastor's expense reports, your church can provide an oversight that eliminates a lot of questions.
2. Internal controls protect the assets and reputation of your church. You want to pass the "front page" test. When there's good news about a church, it usually ends up in the lifestyle section of the local newspaper. But if there's bad news? It's usually on the front page. Or these days, it's an easy target for widespread social media. With strong internal controls, a church can more easily refute erroneous claims brought by any form of media. Or better, avoid bad press altogether.
3. Internal controls provide reliable financial information. The better a church's information, the better the decisions the church's leaders can make.
4. Internal controls detect dishonest actions. If someone does act, out of incentive or rationalization, then it won't take long for the internal controls to reveal it.
5. Internal controls detect honest errors. People make mistakes. The internal controls can also weed these out sooner rather than later.
Vonna Laue is a partner and West Region Director with Capin Crouse LLP, a certified public accounting firm specializing in nonprofit organizations. She is also an Editorial Advisor for Church Finance Today. This post is adapted from a presentation Laue gave to the Mile High Chapter of The Church Network (NACBA) in September.
Find detailed help and training for protecting your church's financial health in the Essential Guide to Internal Controls eBook.