Trap #8 Violating basic accounting rules and practices (Part 3)

Aug 3, 12 • NewsNo Comments

The larger a church grows the more ministries it will enter into. (Examples include day care services, private schools and family life centers.)  Following their parent church’s lead, these satellite ministries often launch into a significant growth arc placing additional pressures on church administrative staff. Due to the “tyranny of the urgent”, an already time-strapped admin staff cannot handle the accounting and management of another activity. To alleviate this pressure, many churches will allow the subsidiary activity to establish a separate management structure and maintain a separate set of books.

A separate set of accounting records is not necessarily a bad thing and in fact may be preferable.  This is due primarily to differences in the accounting needs between a church and its related entity.  For example, a church’s primary source of revenue is free-will gifts and offerings. But, a private school’s revenue stream is made up mostly of tuition and fees billed to students requiring a much more sophisticated accounting. (Accounts receivables, receivable write-offs, deferred tuition, etc.)

However, where churches tend to make a mistake is allowing a ministry to operate independently with LITTLE OR NO ACCOUNTABILITY TO THE CHURCH THAT BIRTHED IT.  All churches with satellite ministries need to understand that even though these ministries operate independently with little or no oversight, if no separate corporate structure has been created, the church is responsible for all of their subsidiary’s actions! 

Key: Best practices dictate that all satellite ministries should be included in the church’s regular financial reporting system.

Key: Some of the things we have seen go wrong when this doesn’t happen:

A ministry could be undergoing significant financial difficulties and the parent church has no knowledge of it.

Payroll deposits become delinquent; the church doesn’t find out about for several quarters and ends up having to fund the ministry to make up the shortfall.

An executive director, not accountable to the parent church, perpetrated fraud by creating “phantom employees” and cashing the phony paychecks.

A private school entered into transactions prohibited by the IRS Code endangering the church’s tax exempt status.

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