PSK CPA

ECFA and Commission on Financial Accountability

Just finished listening to a webcast of the Evangelical Council for Financial Accountability (ECFA) – www.ecfa.com – on the commission it's been asked to set up by Sen. Charles Grassley (R-Iowa).  For several years, Grassley's been pushing hard on some high-profile tele-evangelists on some big questions.  Now, he's asking the ECFA to be an independent group and offer suggested solutions to some key issues.  A couple of the areas to be examined:

1. Should churches be required to file an IRS form 990, like other nonprofits?

2. Should the ministerial housing allowance exclusion be modified/limited?

3. Should the prohibition against political campaign intervention by churches be repealed?

4. Sould there be tighter requirements related to "love offerings"?

I think the ECFA is very much on our side, so they'll protect the interests of churches in general.  Still, because it is a long-standing advocate of financial accountability by churches, the ECFA will probably advocate some tightening up in certain areas.

PSK is planning on being involved with the commission, at least in providing input.  Thoughts anyone?

A Well Defined Purchase Approval and Payment System

There is a great difference in attitude in the church environment between receipts and disbursements.  While churches exercise extreme vigilance over the “inflow” of funds into the church, many have a rather cavalier attitude towards the “outflow”.

Churches also tend to rely on a few “fraud prevention” methods which in my opinion provide little more protection than a security blanket.  They may give a warm and fuzzy feeling, but are no help in a real crisis.  The two I hear most often are the requirement of dual signatures for checks over a predetermined amount and the requirement that a check request form be filled out before anyone gets paid.  It is not uncommon for these to be the only two “fraud prevention” controls exercised over cash disbursements.  Churches that rely on methods this simple are unaware of two basic facts.

• First, dual signatures and homemade check requests are absolutely no match for an ethically challenged employee with the courage to forge. 
• Second, and this may be the most surprising, many of the larger and more spectacular embezzlements involve tampering with the church’s cash outflow, not the inflow.

Key: While no system is foolproof (especially if collusion is involved) the best fraud prevention practice in regard to disbursements, is to segregate the bill paying tasks between as many people as possible.  Some of the more important tasks to distribute are:

• Payment approval
• Receiving of goods
• Check preparation
• Check signing
• Bill mailing
• General ledger maintenance

Unfortunately, very few churches have enough employees to split all of these tasks up.  So what can be done?

Just as with cash receipts, a good place to start is by holding another brain-storming session in which the church’s procurement processes are analyzed.  Flow-charting is a very useful tool in this exercise.  Then, to the best of the church’s capabilities, the tasks should be distributed among several employees and volunteers.  But even after this process, most churches will have more tasks than people to give them to. 

But, there are other steps that can be taken.  Although they take place after-the-fact, these practices still provide strong measures of fraud prevention. 

• First, someone outside the business office could be assigned the task of reconciling the bank account monthly.  This could be another employee, the business administrator, or a competent volunteer.  The reconciliation should not solely be a “balancing” of the checkbook but should also include a close inspection of the cancelled checks for endorsements and signatures and an analysis of outstanding items.  Online banking and remote access has made this practice even more efficient and practical, as volunteers do not have to come to the church office to do the work. 
• Another step is to perform an analysis of the church’s check register by exporting it to an electronic spreadsheet and sorting by vendor.  It is surprising how quickly check writing “anomalies” can be detected using this procedure.  This practice should also be performed periodically.

Although not foolproof or guaranteed to catch everything, these two practices serve a bigger purpose.  Key: They are loud and clear advertising to any and all, that someone is looking.  This will force a potential thief to at least stop and ask himself; “Do I feel lucky today?”

Awareness of ALL Sources of Revenue

Any discussion of church tithes and offerings practices usually includes both a pat on the back and a criticism.  First, in regard to the normal Sunday offerings I can say to most churches, “Way to go!”  In fact, when I ask a client if they have taken any fraud prevention steps, the first thing usually mentioned is how much the church has done to protect the offering plate.  Seldom do I encounter a church that does not have multi-member count teams, rotating terms of service, locking bank bags, dual-access safes and in an increasing number, the use of an armored car service.  I would venture an educated guess that the majority of churches have more than adequate controls over Sunday receipts.  For some, Fort Knox would be an easier target.

But in regard to the rest of the money, the funds that come in during the rest of the week, I often have to say, “What were you thinking?”  While being diligent to a fault on Sunday morning, almost anything and everything goes the rest of the week.  Here are two in my hall of fame:

• Offerings, fees and other receipts arriving in the mail or dropped off by members are simply dumped on the financial secretary’s desk.  I have entered offices with large piles of unguarded cash on the accountant’s desk more times than I can remember.
• Special events funds sometimes are “managed” by a volunteer.  The funds are kept off campus and are not turned over to the business office until the event is over.  No accounting or reconciliation of goods sold is required.

Needless to say, some of our more interesting and sometimes humorous fraud stories occur in these two areas.

However, this is no laughing matter, because a significant “event” could cause irreparable damage.  That being the case, definite steps should be taken.

• First, a brainstorming session could be held, the purpose of which is to determine all sources of income. 
• Once identified, all sources should be included in the church’s normal collection policies and procedures. For example,
  • For weekday drop-offs and mail-ins, a lock box could be kept in the church’s safe in which all of these receipts would be placed unopened. 
  • A separate log or register should be maintained to keep a record that the amounts were received. 
  • On Sunday, the box could then be opened and counted by the teller team on duty.

One additional principle – Don’t push your luck!

“They did not require an accounting from those to whom they gave the money to pay the workers… (2 Kings 12:15)

            Well, I guess the only thing that can be said is that nobody’s perfect! 
We have no way of knowing if they lived to regret this lapse in accountability.  I do find it amusing that in spite of their exhaustive planning, they left a fairly significant loophole; not requiring an accounting of how the money was spent.  Perhaps they overlooked it, or more than likely, they became overconfident.  With all of the good folks doing so many good things, there was no need to mistrust anyone.  And in their case, it apparently worked out.  But if I were pastor of a church, I wouldn’t follow their lead.  It’s far too dangerous to push your luck.

The Bottom Line

             Like it or not, pastoral leadership of a church includes financial abilities as well as spiritual.  Pastors who ignore this fact do so at their own peril.  However, those who embrace this leadership role enhance the likelihood that their church’s ministry will not be derailed by financial catastrophes.  Here is a little exercise you may want to employ to make sure your church’s finances do not end in chaos.  Periodically, perhaps quarterly or semiannually, get out a tablet and write your thoughts on the following questions:

• Do you have a financial mentor?
• Are you paying attention to what is going on with your church’s finances?
• If receipts are down are you sure it is not the result of loss of faith in the administration of the church?
• Are you actively seeking ways for your people to participate in giving?
• Have you reminded yourself lately that financial matters of the church are spiritual matters too?
• Do you have security measures in place to protect the church’s assets, the most important of which are its employees and volunteers?
• Have you distributed the financial tasks among several people?
• Are your records and reports helping you do ministry?
• Do you have established processes that are understandable and repeatable?
• Is your church playing by the rules when it comes to the IRS?

           Taking just a few minutes to ask and obtain answers to these questions can help a pastor avoid   wasting enormous amounts of time putting out fires.  The ultimate bottom line? He can then spend more time doing what he was called and gifted to do, shepherding his flock.

Compliance with the Tax Laws

Churches tend to have only one motivation for staying in compliance with the tax laws.  And that is staying out of trouble.  Churches practice compliance with the Internal Revenue Code primarily to avoid unnecessary penalties and interest, protect their tax-exempt status and stay out of the news. 

The prevailing attitude is “We do these things because we have to; the government is making us.”  Most church’s see no benefit in compliance other than staying in the government’s good graces.  The resulting tendency is many do just enough to get by.  But, by having this attitude they are missing another very good reason why compliance is helpful.  Key: Being serious about government compliance also provides another level of fraud resistance.

Knowing where many of these laws came from makes the same point.  Our governments aren’t really very proactive.  Contrary to popular opinion, they don’t dream up rules and laws just to be belligerent, they are more reactionary.  Many of the rules churches must comply with were implemented in reaction to some type of bad practices or abuse of existing regulations.  A very good example is the charitable contribution substantiation rules.  One of the reasons for their coming into existence was the tendency of some people to deduct tuition payments to the church school as contributions.  Also, “accountable reimbursement plans” are the result of abusive employee business expense deductions during the 1980s.  Although it may come off sounding harsh, the fact is both of these practices, mischaracterizing payments as contributions and inflating expense reports, are forms of fraud the government wishes to eliminate.

The purpose of strong IRS compliance is not simply to stay out of trouble. Key: Doing what the government asks will also close down some favorite targets of individuals committed to stealing from the church. 

A fraud resistant church should take steps to be in compliance with IRS regulations regarding:

• Ministerial taxation
• Personnel benefits
• Business expense reimbursements
• Credit card use
• Benevolence
• Contribution substantiation.

The Church’s Accountability Extends to the Government

“When they had finished, they brought the rest of the money to the king…” (2 Chronicles 24:14)

            After implementing their processes, significant funds were raised.  The money was paid to the masons and carpenters and the work was begun.  Eventually, the temple was restored and services resumed.  And they even had a surplus!  The surplus was returned to the king.  Once again, I must confess that this next illustration is quite a stretch and ask the reader to remember I am not attempting to interpret Scripture, only sharing points this passage brings to my mind.  Because this topic is not very pleasant I will keep it short!

            Key: What I was reminded of, when I read that the surplus was returned to the king, was that like it or not, in some respects the church is accountable to the government.  In spite of our nation’s long held and cherished belief that the government should not interfere in the affairs of the church, the church does have a few responsibilities to government it must comply with. 

            Unfortunately, churches and ministries are coming under increasing scrutiny by the federal government.  A discussion of why this is taking place is beyond the scope of this discussion as is any treatment of church and state issues.  Key: However, to avoid unnecessary conflicts that have the potential to cripple a church’s ministry, each church should be diligent in three areas which in recent years have become hot button issues.

• First, be very careful to establish salaries and benefits that are reasonable.  One way to insure that salaries are reasonable is to have senior level salaries set by an independent compensation committee that keeps minutes of its decisions and relies on compensation comparison data to insure that the church’s salary is consistent with the market.
• Second, be aware of two types of IRS non-compliance by churches and ministries that frequently make the news.  If a church reimburses its employees for business expenses incurred on behalf of the church, it should do so using a written reimbursement plan that complies with IRS regulations.  Also, if a church issues credit cards to its employees, expenditures should be governed by a credit card usage policy as well as the reimbursement plan. 
• Churches should also exercise caution in soliciting and accepting gifts from donors.  All gifts of cash and property must be substantiated in the form of a written statement that is prepared in accordance with specific guidelines issued by the IRS.

Full Disclosure Financial Statements

Another practice of many churches plays right into one of a fraudster’s strengths, the ability to withhold information.  Perhaps in an attempt to avoid interminably long finance committee meetings brought on by micro-managing members, or more likely, fearful that the messenger is going be killed, some church administrators tend to hold back on the financial facts. Key: Failure to present full-disclosure financial statements is the most common way of holding back information. 

Instead of traditional financial statements, a church may elect to present summary information in an attempt to control the facts.  Making matters worse, they may also use electronic spreadsheets to do the work.  Although spreadsheets are very powerful and useful, they have one major flaw: the preparer is in total control over what goes into the report.  There are no balancing requirements as with a normal set of financial statements based on a double-entry accounting system.  Some crooks have one word to describe this situation. Disneyland!

Financial statements are simply another form of communication used to convey the financial situation of the church.  Their goal, in the church environment, is to answer a few basic questions:

• How much cash do we have on hand?
•  Is any of it restricted? 
• What kind of assets do we own? 
• Who and how much do we owe? 
• How did we do this year?
• Did we stay within budget?

            Key: To answer all of these questions adequately, a church must present a full set of financial statements.  This includes at a minimum, both a balance sheet and an income statement.  (These are business terms; the corresponding non-profit titles are statement of financial position and statement of activities, respectively.)  In addition, if a church has a high volume of restricted activity, a separate schedule of restricted gift activity should also be presented. 

Not only does “summary reporting” result in an uninformed church.  It can also result in a victimized church.  A church with a history of being satisfied with summary reports combined with poor personnel decision-making may end up with an embezzler having the best of both worlds; being able to take what he wants from the church and covering up the evidence with his own reporting system.

Processes are Important

“They did this regularly…” (2 Chronicles 24:11)

    Joash and Jehoiada established a set process to be followed.  A collection chest was placed in a prominent place.  As they entered the temple the people deposited their gifts in the chest.  When significant funds had been placed in the chest the Levites transported the money to a counting room where the royal secretary and the high priest supervised its counting and recording.  After the amount had been determined the money was placed in bags and eventually paid to the craftsmen repairing the temple.  The Chronicles passage contains a capstone phrase; “they did this regularly.” 

    This phrase reminded me of a cardinal rule of efficient organizations.  Key: Efficient organizations become efficient by establishing well defined processes.  Joash and Jehoiada operated according to a plan.  The plan was orderly, it had a fixed routine, it didn’t vary and it was repeatable.  All of this was done with two objectives. 

•  First, they desired to conduct the business of the temple with a high degree of integrity. 
•  Second, they had a desire to accomplish the mission at hand, restoring the temple.

     Unfortunately, too many churches follow a “shoot from the hip” process.  Some even take pride in it.  In the name of “flexibility” some churches disdain established polices and processes as too confining.  Those that choose this route do so at their own peril.  There is a fact of the business side of churches that everyone should be aware of.  Every church has processes even the ones who take pride in their flexibility.  Key: The challenge is this: will the church be in charge of the processes, or will the processes dictate to the church?

    If a church has no written policies, those participating in the church’s financial activities will establish them.  The processes will be made up along the way and will change each time the church experiences turnover in administrative staff, from the pastor down to the secretaries.  The church’s processes, policies and procedures will be in a constant state of flux.  At least until the train wreck.  That is when too many churches finally say, “You know, we need to establish a routine around here!”

    To avoid the train wrecks time needs to be taken to establish processes.  This doesn’t have to be complicated and the policies and processes do not have to be exhaustive, resembling a military or government code of regulations.  Key: The church processes should be defined in writing and should be simple and straightforward, understandable, repeatable, and yes, flexible.  Some of the areas that should be covered are:

•  Cash receipts and disbursements
• Personnel; hiring, terminations and benefits
• Facilities usage
• Member contributions.

Verne Hargrave is the Church and Ministry partner at PSK LLP and author of the book, Weeds in the Garden.

Keeping Up with the Times

Until the 1960s, perhaps into the 1970s, churches were rather slow to pick up on new ideas, particularly in regard to technology. (If you have a hard time believing this, think back to the first time someone wanted to bring an electric guitar into your sanctuary!)  But that is no longer the case, especially when it comes to information technology.

Churches have embraced the digital world and are becoming very proficient in the use of computers.  A vast array of applications has been made available to the church including sophisticated financial accounting and reporting, childcare security, online purchasing, online tithing, phone trees and coffee bars with free wireless internet.  Without a doubt, churches have become technologically savvy.

Unfortunately, there is a vast array of other things that most churches aren’t so savvy about: the numerous new portals computers provide through which fraudsters can gain entry into the church.  Key: Computer and online crime is drastically changing the face of fraud prevention. 

To stay abreast of the rapid change in technology and the risks this change brings churches should ask themselves the following questions on a regular basis:

• Does our church have a formal Information Technology security plan?
• Do any individuals at our church have access to all modules of the church’s software system?
• Does our church partition its computer applications so that employees and volunteers have access only to files necessary to perform their duties?
• Does computer access require passwords that are confidential and unique?
• Are our passwords changed periodically?
• Are passwords complex including alpha, numeric and case sensitive characters?
• Do we have backup procedures that are performed regularly that include off-campus storage?
• Do we have measures in place to protect the church from malware?
• Do we train our employees to avoid accepting email from unknown locations?
• Do we have a download policy?
• Do we maintain separate public and private wireless networks?

Record Keeping is Important (And so is Reporting)

  “When the amount had been determined…” (2 Kings 12:11)

             First, I need to remind you once again that I am an accountant, not a Bible scholar so what I am about to do here is really crawling out on a limb.  I am going to attempt a very simple word study because the word “determined” in this passage seems to be much more significant than it appears.  Its meaning is much deeper than simply knowing how much money was raised.

            After consulting a number of word studies and commentaries, I found some interesting opinions as to what “determine” means.  To some the word means to “measure” or to “weigh out”.¹  However, to others the word can mean “to make an estimate by comparing to a standard” or “to adjust to a standard to set something right.”²  A church’s recordkeeping and financial reporting are of deep importance.  They serve as measuring rods to determine how the church is doing.  Financial records and reporting can also serve as a compass, helping keep the church on course.  They also are the chief method of financial accountability.

            Key: One reason why a church’s financial reporting is so important is that, as unpopular as this may be today, a church is in the accountability business.  The exact phrase, “give an account”, is found several times in Scripture.  In Romans 14:12 Paul reminds that each of us will be accountable to God.  The writer of Hebrews tells us that we must obey our religious leaders because they serve us with the understanding that they will have to give an account of their stewardship to God.  And Jesus, in His parable of “The Shrewd Manager”, used the phrase in connection with financial management.

            Giving an account is what financial reporting is all about.  That is why my profession is called “accounting”.  Contrary to the stereotypes, accounting is really not about picky people counting things.  It’s about giving a report; hopefully a good report.  A church’s accounting and reporting system is not boundary setting.  It is not a set of rules designed to keep ministers and staff from doing what they want to do.  Financial reporting is not a restrictive process that will inhibit a pastor’s ministry.  It is primarily a method of “giving an account” to the congregation of the condition and activities of the church, stated in dollars and cents.

            Key: Churches that follow the best practices ask themselves the following questions.  “How thorough is our record keeping?” and “How forthcoming are we in communicating our reports to the body?”  Those that avoid financial “train wrecks” have reporting systems that include accountability: the willingness to be forthcoming and complete in their reporting.  They also are transparent: they are unafraid to open up their books and records.

            Here are a few practical ways to do this. 

• First, be sure your church is producing a complete set of financial statements.  This will include a balance sheet which will reflect the assets the church owns, the liabilities the church owes and the balance of any funds restricted for special purposes.  An income statement, usually called a budget report in the church environment, should accompany the balance sheet.  This report will reflect the income and expenses for the period letting the reader determine if the church is operating within its means.  If a church allows designated or restricted gifts to be given by members, a report displaying the restricted funds received and spent should also be included.    
•  Second, don’t be tempted to control events or information by using electronic spreadsheets exclusively to report to the church congregation.  Often spreadsheets are prepared which provide a summary of “highlights” of the church’s financial results instead of a full set of financial statements.  These often can be no more than “spin documents” created to keep the people happy, while hiding certain “lowlights” of the church’s activities.  Unfortunately, when the spin runs out, trouble soon follows.   
• Third, within reason, have an open records policy.  Do not be afraid to let members see the financial condition of the church.  This can be done by establishing a clearly defined process to allow inspection of the records by those who make reasonable requests to do so.

Verne Hargrave is the Church and Ministry partner at PSK LLP and author of the book, Weeds in the Garden.