Internal Controls and Regulation of the Not-for-Profit Sector: Increasing Transparency for Churches

Regulation of for-profit organizations and fraud within them are commonly researched areas; however, many overlook the need for adequate internal controls and regulation of the not-for-profit sector, particularly religious not-for-profit organizations. Fraud has been a problem in this sector for a while, but it is frequently neglected due to the false sense of security that people have when dealing with not-for-profits. The not- for-profit sector is much less regulated than the for-profit sector, and religious not-for- profit organizations are not subject to any of the regulations that other not-for-profit organizations face. In order to gather appropriate data for determining ways through which fraud can be better prevented in the not-for-profit sector, an understanding of types of fraud committed and reasons for committing fraud were found through research. Cases of fraud found through research were reviewed, and the financial departments of two different churches were analyzed through the questioning of the financial director and the overview of audited financial statements. Additionally, the requirements of not-for- profits set by the IRS were researched, and the new Form 990 was studied. It was found that internal controls in churches are often lacking, especially in small churches. It was also found that religious entities are exempt from all governmental regulation, and many argue that these exemptions are constitutional. In conclusion, it was decided that these exemptions are a violation of the First Amendment to the Constitution, and they provide more opportunities for fraud in such organizations through the lack of accountability. All not-for-profit organizations should be regulated equally