Trap #1 Operating without a plan – Long-term plans

Because of dependence on the Whack-a-Mole management strategy, many churches seldom look past their current situation.  Unlike ancient sailors who took periodic “soundings” to determine how close they were to shore, many churches take few, if any steps, to determine if they are headed for rocky waters.  Unfortunately, a rising number of them do not realize they are in trouble until they run aground.

It is true that the Bible cautions us to not presume on the future. (James 4:13-15)  But, churches are also called to be good stewards.  As long as the church is acknowledging God’s will in the matter, part of good stewardship includes making some long-range plans.  Failure to do so could result in disaster.

Operating without a master plan in regard to land and facilities

Several years ago at one of PSK’s church business administrator breakfasts, we invited the local fire marshal to speak on fire safety.  He mentioned one thing that surprised me and another thing that made me think of the importance of master planning.

The surprise?  Other than petroleum or chemical fires, the fires feared most by firemen are church fires.  Because churches are filled with combustible items, paper, wood, fabrics etc. a small electrical problem can quickly ignite into a raging inferno.  But what he said next made me realize that poor master planning can be deadly as well. 

How does this tie into master planning?  The factor that endangers firemen the most is not the presence of combustibles. It is the fact that too many churches are a hodge-podge of different structures.  Without an integrated building plan which looks to the future, church structures tend to become a series of additions added one to another.  The result is a confusing maze of hallways, cubbyholes and dead-ends. (Tragically, in some cases this has been too literal).

This can be avoided if churches take the time to plan for the future.

Church Fraud Hotline – Fraud in the Church – Survey Results part 3

Part 3 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

Our church has established a formal program for reporting fraudulent activities.

In its 2010 Report to the Nations, the Association of Certified Fraud Examiners revealed that 40% of fraud cases were initially detected by anonymous tips. Half of the tips came from employees.  Approximately two-thirds of these cases were communicated through the entity’s fraud hotline.  This data is not inconsistent with prior years’ findings.  In fact, during one year a whopping 60% of detected fraud was discovered by the combination of tips and/or by accident!  In our survey, we learned that 59% of the churches responded reported having no mechanism for employees, members, and vendors to report suspected improper behavior.

The use of anonymous hotlines, usually found on an entity’s website, has been quite successful in the corporate and government environments.  However, this is a tough sell in the church environment as it seems distasteful to most people involved in church.  And that includes me…

I have been (and remain) reluctant to recommend to my church clients taking such a step.

However, one solution I have seen, that may be a good middle-ground is to outsource this function.  There are third parties who provide this service by making available a toll-free phone line and a web address.  Because confidentiality is crucial, all reports go directly to the third party and bypass any nosy people along the way.  As part of the church’s whistleblowers policy (which I hope your church has) a description of the third party providing these services and the processes to be followed should be included in the church personnel manual.

What do you think about this idea?

Trap #1 Operating without a plan – Short-term plans (continued)

Operating without a formal, written accounting and management policy manual

In addition to a budget, a formal management document is a must to help insure that the church makes appropriate and effective short-term decisions.  Written policies and procedure documents assist churches in the administration of activities by helping to set forth in clear, unmistakable terms the mission of the church and how it will be carried out.  The manual will also establish and reinforce the organizational structure of the church by providing a clear delegation of duties and responsibilities.  It also will serve as a guide to direct and oversee the carrying out of Church activities.

One of the purposes of written policies is to head off problems before they arise.  And, in cases when problems do arise, having policies in place makes navigating the choppy waters manageable.  For instance, suppose your church is offered a gift of land of a sizeable dollar value. (According to the donor…)  The church accepts the land, transfers the title, and later learns the land has significant environmental issues.  (For example, the land was the site of a former gas station, dairy, or dry cleaners, etc.)  Unfortunately, accepting the land also results in accepting the liability for cleaning up the mess.  A good contribution policy could help prevent this from happening by requiring all gifts of property be approved by the appropriate committee prior to acceptance.  Contribution acceptance is just one of the topics to be included in a policy manual.  Here are a few more.

Organizational structure

Budget development

Cash management

Offering counting, recording and reporting

Bill approval and payment

Vendor approval

Investments

Financial statement presentation

Personnel and employee benefits

Insurance

Conflicts of interest

Fundraising

Building and property use

Restricted funds

Intellectual properties

Short-term mission trips

KEY:  A church accounting and management policies and procedures document is another brick in the wall of risk management.  The goal of establishing clear policies is to anticipate problems before they arise and having a suitable response should they occur.

Church embezzlement case goes to trial

Mar 9, 12 • Breaking NewsNo Comments

Pastor ordered to stand trial for personal use of Church funds

– defense claims pastor had almost no rules to follow.

Lansing State Journal has the complete story @ LSJ.com

Formal Church Fraud Risk Programs – Fraud in the Church – Survey Results part 2

Part 2 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

Our church has established a formal program for managing fraud risk.

Almost 63% of our respondents reported that they have not conducted a fraud risk assessment or implemented an ongoing formal church fraud prevention program. Unfortunately, my guess is that the national average is much higher. It is hard to pinpoint what might be the cause of this rather high percentage but two reasons are prominent:

  • The workload of most church business administrators (CBA) has them stretched to the limit.  There is barely time to get all of the routine tasks completed on a timely basis much less take on additional projects.
  • When they do try to implement a church fraud risk program, many CBAs end up as the Lone Ranger. In many, if not most churches, fraud prevention is a very difficult proposition to sell. The biggest hurdle? The mistaken belief that “it can never happen here.”

It is not enough to simply be aware of the threat of fraud or go through the motions of fraud prevention. Ministries that don’t commit themselves to a strong fraud prevention and detection program will likely end up as victims.

A few key ingredients of a formal church fraud risk program include:

  • Education of church employees, volunteers and members of the risks of fraud.
  • Conducting an initial “brain storming” session whose purpose is to identify potential fraud portals.
  • Assigning ownership of fraud prevention processes to key church leaders and employees.
  • Implementing a periodic review of transactions.
  • Periodic review and assessment of the church’s systems.
  • Implementation of an anonymous whistleblower hotline. (More about this in a subsequent post)

Trap #1 Operating without a plan – Short-term plans

Operating without an annual budget 

In fairness, there are very few churches that do not have some form of budget. The key words in this caption are “operating without”.  The main point here is that even though most churches do have some type of budget written on paper, far too many operate as if they did not have one or misuse the one they do have. 

Historically, church budgets have had a two-fold purpose. 

First, they fill a financial role helping to make sure the church stays within acceptable and approved spending parameters.

KEY: The pendulum swings pretty wide in regard to church mismanagement of budgets.  Some churches completely ignore the budget once it is approved begging the question, “Why have one to begin with?”

Other churches let their budget become a straight jacket, leading to some unfortunate results: 

“Stingy” finance committee/team members may refuse to allow their church to begin new ministries because “This is not in the budget!”  I have seen situations where churches have missed out on great ministry opportunities because they “postponed” them until the end of the year when the new venture could “be budgeted”.   This in spite of the fact that the church had ample cash in reserve to fund the new project. 

Occasionally a church staff may be intimidated by finance team members and are fearful of overspending a budget line item. But, due to their belief that a project is essential, go ahead and authorize expenditures. To cover their tracks, the expenditures are not included in the budget but are classified to other less visible areas, such as designated funds or the church’s net asset account (retained earnings).  The budget report is unaffected making it appear that the church “made budget”.  Too much of this type of activity results in meaningless financial statements.

The church budget also has a spiritual role in that a church budget is simply the congregation’s vision for the coming year, stated in dollars.

KEY: This is particularly important in the establishment of your chart of accounts.  A church’s chart of accounts should reflect its ministry. What your church management software representative suggests is just that; a suggestion. The same goes for your CPA

What about the 1099K ?

The AICPA CPA Letter Daily reported that companies that receive payments from credit cards or third-party settlement agencies may have to keep an eye out for 1099-K forms this year. These forms will be sent to businesses that receive more than $20,000 in gross payments from at least 200 transactions annually. Companies that receive both a 1099-K and a 1099-MISC should make sure their income wasn’t reported twice.

That’s great advice, but how does that apply to churches? Under this new reporting under the tax code, it is likely that churches who receive donations via credit card will receive a 1099-K from their merchant. However, as a tax-exempt organization (automatic for religious institutions), there is no further reporting requirement for churches. Nonprofits who file a 990 and taxable entities will report the information from 1099-K on their respective tax return, but this new regulation doesn’t change the fact that churches are exempt from filing a 990.

Thankfully, this new requirement will have very little impact on churches. But the tax laws change frequently, so it pays to stay informed. Subscribe to our updates by entering your email address in the box to the left so you don’t miss a thing!

Have other church tax questions? Add your comment below.

-Bryan Baughman, CPA, Church and Ministry Principal at PSK, LLP

Ten Things to Avoid in Church Administration

Avoidance means to succeed in keeping away from something dangerous or undesirable.  Conversely, the opposite of avoid is to confront.  In church administration, the only way to avoid dangerous situations is to proactively confront, or face down, certain ideas, attitudes and practices within the church.  In doing so, an administrator’s life as a church leader can be a positive experience due to the fact that more time will be spent focusing solely on administration, not being a fireman.

In this next series of blog posts we are going to spend our time discussing ten traps church business administrators should avoid. Or, stated positively, ten areas in which the administrator must be proactive in order to face down danger. The first of the ten is planning.

Trap #1 Operating without a plan

When my son and daughter were young we often went to Chuck E Cheese, a restaurant catering to kids, which specialized in pizza, clowns and games.  One of their favorite games was Whac-a-Mole, the object of which was to score points by clubbing moles (mechanical not real!) over the head as they popped their heads out of holes. Many churches follow the Whac-a-Mole management theory.  When “the tyranny of the urgent” kicks in, issues tend to be addressed as they pop-up. This method, such as it is, leads to many unpleasant results:

  • The inability to make good decisions
  • The inability to report reliable results of ministry activities
  • The loss of credibility of leadership
  • The loss of faith by the congregation in leadership’s ability to guide the church.

KEY: In the worst case scenarios the result can be fraud.  Fraudsters do not like baselines. (More importantly, they do not like to be caught!) Baselines help establish what is normal within an organization. With no processes or plans in place, baselines cannot exist and a church will never know what normal is. A thief can swoop in, help himself to what he wants, and no one will be the wiser.

In our discussion of this particular “must to avoid”, we will break the planning process into two parts.

  • Short-term planning
  • Long-range planning

In our next post we will begin with a discussion of short-term planning

Fraud in the Church – What the Survey Tells Us

The occurrence of occupational fraud in the church community continues to rise at epidemic proportions.  Evidence of this is found in the steady flow of news accounts reporting churches hit with fraud:

Church Secretary Takes Her Church for $200k

What went wrong at this Church? How could this one employee make off with $200k of funds raised for her congregation and parochial school? Read the full article here. Simple financial controls may have prevented this! Does your Church have adequate internal controls? We can help!

Source: Journal Sentinel Online – Milwaukee

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