I was recently elected treasurer of a non-profit social club. (We’re a 501©4, not -3 kind of organization.) After a club event recently which generated significant amounts of cash, I wrote checks to two club members for costs they had advanced (flyer printing and mailing, coffee and cookies.) So far, so good. But after the event, where we collected about $500 in cash for admissions, the two persons asked me to “cash” their checks. I said no; we’d paid them and they could go ahead and deposit those payment checks. (I will reimburse people in cash for expenses if they ask, but then I get a cash receipt signed by them, saying how much they received and for what.)
The club president insists that this is an ordinary practice and that what I should do is accept the now-endorsed checks which I have just written, pay out the cash and DEPOSIT these checks into the club’s account. Huh? “That way, you have a record,” she says.
Gee, I’d think that the proper way to get a record you paid someone would be for that person to deposit the check in his or her own account and then, when it clears through the club account, we’ll have an excellent paper trail proving what was paid and to whom.
The president now insists that our old bank “always” accepted these checks in the deposits, although I don’t see how they can be credited to or debited from our club account (clearly they can’t be debited–we’ve already paid them off; and just as clearly they can’t be credited since it’s our own money).
I assume this whole notion derives from the process of companies cashing payroll checks for employees. But these folks ain’t employees (we don’t HAVE employees.)
Should I cash reimbursement checks or not? And if not, what’s the reason?
I’m not a CPA, but am a banker.
IMHO, issuing a reimbursement check to a member only to have the member endorse the check back to the club and then depositing the check into the club account, aside from being dumb on several levels, leaves you with a weaker audit trail. Probably not enough to put the club in danger of losing it’s non-profit status, but enough to potentially cause accounting nightmares. It also opens an avenue for abuse - a member could claim that the endorsement was forged and they never received benefit of the reimbursement. The onus is then on the club to prove the member got the cash. If the member cashed the check elsewhere and claims forged endorsement the onus is on the check casher, not the club. If the check is deposited to the member’s bank account there is no question who received benefit.
Depositing a check into the same account on which it is drawn is not only illogical, it could be costing the club money. If the service fees on the club checking account are charged based on activity (usually referred to as an ‘analyzed account’ - very common for commercial and organizational accounts) then those checks, which do nothing but cancel out the deposit slip, are raising your monthly fees.
Here’s what I would do in your scenario:
Take back the check and void it, making a note on the check that cash was issued in lieu of. Create a cash receipt signed by the treasurer and the member. Attach the voided check to the cash receipt and file.
Related note: NEVER cash a check made payable to the club! The IRS frowns on this severely. Why? There was once a gentleman who helped take up the collection at his church every week. When the cash donations were tallied the kind gentleman would write a personal check to the church in the exact amount of the cash “so the church wouldn’t have to store the cash until Monday’s deposit”. Nice, huh? What the church didn’t know was that the kind gentleman was then claiming those amounts as charitable deductions on his taxes - and he had the cancelled checks, made payable to the church and deposited in the church account, to prove it! That is why, children, the IRS will no longer accept a cancelled check alone as proof of a donation. That kind of scam could cost the club its non-profit status.
As an internal auditor, I have to say that Doctor Jackson was right on. The only thing I would disagree with was the “what I would do in your scenario”. I would make sure that all members were aware that no checks written on the account would be cashed, and that all reimbursements over a certain amount (say…$50?) must be done via check.
By cashing the check for them, you are opening a control gap, something that auditors don’t like at all.