Corporate Governance in Religious Organizations: A Study of Current Practices in the Local Church
Elson, Raymond J., O'Callaghan, Susanne, Walker, John P., Academy of Accounting and Financial Studies Journal
This paper addresses corporate governance practices in religious organizations by examining fiscal oversight and financial management practices in the local church. Fiscal oversight includes the existence of an independent board of directors with a financial expert and documented policies and procedures. Financial management includes the existence and use of a budget, controls over cash receipts and disbursements, financial reporting and tax reporting and compliance. A questionnaire was used to collect data from various denominations. The results showed that churches do have adequate fiscal oversight and financial management controls. However, opportunity exists for improvement. Churches can do a better job of documenting their policies and procedures. In addition, they should communicate these policies and procedures to all employees. It also appears that church accounting personnel do not really know the requirements for preparing financial reports using generally accepted accounting principles. These personnel should consider attending a nonprofit course or seminar to increase their understanding of accounting standards relating to nonprofit reporting, especially Statement of Financial Accounting Standards No. 116, "Accounting for Contributions Received and Contributions Made" and Statement of Financial Accounting Standards No. 117, "Financial Statements of Not-for-Profit Organizations."
The accounting and ethical scandals within such public companies as Enron and WorldCom created an uproar in the marketplace. The United States Congress reacted with sweeping legislation which forced public companies to implement procedures to improve internal controls over financial reporting. Nonprofit organizations may be facing the same peril as scandals continue to affect the sector. The fund raising practices at the American Red Cross after the September 11, 2001, and excessive salaries paid to executives and board members at other nonprofit organizations are some of the actions that are raising concerns among the various constituents.
Religious organizations are also caught in the spotlight because of such issues as the sex abuse scandals in the Catholic Church, embezzlement of funds in various organizations and the use of government funds to support social services and other programs in faith based organizations. For instance, the director of a Christian community was charged with stealing $23,000 and other items from the organization over a two year period (Anonymous, 2000). The tax-exempt status of an organization controlled by a well known televangelist was revoked because of illegal politicking by the organization (Anonymous, 2004a). A Christian charity was accused of using government funds to pay for a job training program that included religious instruction at a local prison (Wilhelm, 2005). A California TV preacher was accused of using donations from supporters to finance a lavish lifestyle that included 30 homes, fancy cars and a private jet (Anonymous, 2004b).
Religious and other non profit organizations have a responsibility to their various constituents to be fiscally responsible and transparent in carrying out their missions. These organizations rely on the public for a significant portion of their annual budget. Support is received by nonprofit organizations in the form of tithes, pledges or donations. Some donations are quite generous such as the $40 million unrestricted gift received from an anonymous donor by a religious organization in the State of Missouri (Preston, 2005a). Others are more modest such as the $1.8 million received by a Baptist church in Alabama for its scholarship fund, and the $1 million received by another religious organization to help victims of the South Asian tsunamis (Preston, 2005b). The Annual Giving USA study published by the American Association of Fundraising Council noted that Americans donated $248.52 billions to charity in 2004, with individual donors providing the largest share at 75.6% or $187.92 billion. Religious organizations received the highest percentage of these donations at 35.5% or $88.3 billion.
Churches have always played a role in social services and their involvement in hurricanes Katrina and Rita relief efforts along the Gulf Coast, demonstrate their capability. The federal government recognizes this and it continues to actively promote diverting government funds to faith based organizations to support social service and public health programs such as youth development and substance abuse treatment. For instance, in fiscal year 2003, 5.1% or $6.8 million of the Department of Education's discretionary grants went to faith based organizations up from 2.1% just two years earlier (Davis, 2004).
Boston (1999) believes that government money is for the first time underwriting social services programs by religious organizations with virtually no significant oversight or strings attached. Some foundations are not deterred and they are showing their financial support by increasing their donations to religious organizations. A recent report noted that 37 foundations provided $168 million to approximately 700 evangelical Christian organizations over a four year period. The organizations focus primarily on such issues as making abortion illegal, banning same-sex marriage and promoting school prayer (Wilhelm, 2005).
Donors are increasing looking to nonprofit organizations to provide transparency in their operations. The Sarbanes-Oxley Act of 2002 (SOX) is one legislation that might provide a starting point. SOX placed increased responsibilities on the board of directors of pubic companies to improve their governance practices by having the financial expertise and independence needed to oversee their managers' performance. Although SOX does not apply to non-profit organizations, there is an expectation in the marketplace for non-for-profit organizations to adopt some of its requirements.
Some nonprofits are doing just that and are early adopters of SOX. A study of nonprofit organizations performed by the accounting firm Grant Thornton found that 48% of the respondents voluntarily made changes to their operations because of SOX (Williams, 2004). The changes were effected in such areas as establishing conflict-of-interest policies, developing procedures for internal financial controls and record retention, drafting code of ethics and audit committee charters, and in codifying protection for whistle-blowers. One organization went a step further by contracting for an internal controls audit to be performed by an independent accountant. The audit focused on the areas of grant making, contract management, and travel and entertainment as part of the organization's efforts to voluntarily comply with SOX (Anft and Williams, 2004b).
Congress is also looking specifically at improving accountability within nonprofit organizations. One of the federal government's proposals is for tax-exempt organizations with $250,000 or more in annual gross receipts to be subject to an annual independent audit of their financial statements (Anft and Williams, 2004a). Some states are not waiting for the federal government and are proposing their own legislation. For instance, a California State proposal would require charities with annual gross income of $2 million or more to file annual financial statements prepared by independent certified public accountants with the state. Among New York State's proposals is one that would require leaders of larger organization to verify that they have reviewed the effectiveness of their groups' internal financial controls (Anft and Williams, 2004a). Wolverton (2005) recommends that nonprofit groups voluntarily improve governance by adopting conflict of interest policies, obtaining a financial statement audit if they have $2 million or more in total revenue, including financially literate individuals, and consider establishing a separate board committee to oversee audits of the organization.
Clearly religious organizations are impacted by these recommendations since they are also nonprofit organizations having obtained exemptions under Sec 501(c)(3) of the Internal Revenue Code. In the broadest sense, a church is a special type of religious organization that includes synagogues, temples, mosques and other organizations with church type characteristics (Runquist, 2005). So churches could be impacted by any legislation intended to improve oversight in nonprofit organizations.
As noted earlier in the paper, churches receive a large portion of the donations made by individuals to charities. Some churches are also receiving a new stream of income or support from the federal government that has specifically targeted faith based organization as part of its social services initiatives. Clearly there is a need for churches to be more prudent in their missions. Churches have varied sizes and expertise. A typical church is a local congregation or community consisting of approximately 150 members. The mega churches seen on television such as The Lakewood Church and The Potter's House, both from Texas with approximately 18,000 members each, are the exception.
Churches will be challenged by their constituents to be more transparent in their operations. They may need to implement any new legislation that is passed by the government addressing governance in nonprofit organizations. Due to limited resources, churches will need to find creative solutions to implement the legislative actions. Perhaps the current governance practices in churches are not bleak. However, very little research is available that addresses corporate governance in churches so the current state of affair is difficult to ascertain. This led to the current research that attempts to address the questions: (1) do churches have adequate fiscal oversight of their operations and (2) are there adequate controls in place in churches over financial management.
In terms of the research, fiscal oversight includes the existence of an independent board of director with a financial expert and documented policies and procedures. Financial management includes the existence and use of a budget, controls over cash receipts and disbursements, financial reporting, and tax reporting and compliance.
The purpose of the study was to provide preliminary insight into fiscal oversight and financial management in the religious community. The study examined fiscal oversight and financial management practices in churches with Christian based doctrine and excluded mosques and temples. The study used churches representing various denominations with a physical presence in the State of Georgia. They were identified haphazardly by searching the website of umbrella organizations (e.g., Episcopal churches in the state of Georgia) and by using a local telephone directory. Churches were excluded if a mailing address was not available or the name of the pastor or minister could not be easily obtained from available sources. An attempt was made to identify multiple churches across a wide spectrum of denominations to ensure diversity within the population. Approximately 249 individual churches were initially identified and contacted during the initial phase of the study. This number was subsequently reduced to 221 since questionnaires were returned undeliverable by the post office i.e., the address of record was unknown.
A questionnaire was developed and used to collect data for the study. It was pre-tested with a small number of churches through which the researcher had prior relationships. A cover letter along with the questionnaire was mailed to the pastor or minister of the churches. The cover letter described the research purpose, provided a time estimate for its completion, and a note thanking the ministers for participating in the research. The cover letter encouraged the pastor to complete the survey if possible or to delegate it to either a member of the board of directors or vestry, or the accounting personnel on staff. A second questionnaire was mailed to non-respondents after approximately two weeks to request participation in the study. Additional attempts were made via e-mail (if e-mail address was known) to non respondents to encourage their participation.
RESULTS AND ANALYSIS
Sixty useable surveys representing a response rate of 27% was achieved. As expected, respondents represented a board range of denominations. However the vast majority (53%) were from churches within the Episcopalian denomination. In terms of membership level, most respondents (75%) had 300 or fewer members as of their most recent year end. The gross revenue of the respondents was consistent with their membership levels with 71% reporting revenue of $300,000 or less.
One church reported employing as many as 42 individuals other than the minister, with the average number of employees at six per church. In terms of full time employees, one church reported having 17 full time employees compared to an average of three full time employees for all churches. Respondents reported having an average of two personnel as part of the church's accounting staff, with one reporting a high of six individuals. More information on the study participants can be found in Table 1.
In terms of fiscal oversight, a large majority of churches (92%) had a separate board of directors or similar organization. The number of board members ranged from a low of three to a high of 40 members, with a typical board averaging 11 members. For those with a separate board of directors, 71% reported that the chair of the board was someone other than the minister while 33% reported that the minister was a voting member of the board. A majority of respondents (95%) noted that board meetings were held on a regular basis, with meetings ranging from a low of four to a high of 50 times per year. The average board met 12 times during a typical year.
Ninety-eight percent (98%) of the respondents reported that the financial information and other significant church activities were discussed with the board on a regular basis and 93% required board authorization of significant financial transactions such as leases and capital improvement projects before the costs were incurred. A majority (87%) noted that their board membership included individuals who were considered financially literate. However, the questionnaire did not ask for the qualification(s) of such individual(s).
In terms of the committee structure within the board of directors, 78% of the respondents reported having separate committees within their organizations with a separate audit or financial committee being the most common (55%). In most cases (89%), the members of the board of directors were appointed via elections held by the church membership. A majority of boards also determined the pastor's compensation package (91%) and a majority (85%) used resolutions to review and approve the minister's compensation on an annual basis.
The responses to questions on policies and procedures used by the churches provide some insight into the control consciousness of these organizations. Only seventy-five percent (75%) of the respondents had formal policies and procedures regarding significant church activities. However, only 62% of these policies were actually documented with a smaller majority (58%) actually communicating the policies to employees. More information on fiscal oversight can be found in Table 2.
The majority of respondents (95%) reported that their organization operated with an annual budget. Of those churches that used a budget, 94% reported that their budget was approved by the board prior to the start of the church year. A majority of the respondents (65%) used ushers to collect the offerings during church services. Other respondents reported using deacons, finance teams, the treasurer and various other personnel, to perform this function. One reported using a board member to collect the offerings during church services.
Funds were held in a secured environment by most churches (92%) before they were deposited. Collections were often deposited in the bank at least weekly in a majority (93%) of the churches. Some respondents reported that the bank deposit was made by the treasurer (38%) or the financial secretary (27%). Other churches reported using ushers, vestry members, office managers, and various other personnel to make their deposits.
Bank reconciliations were prepared at least monthly for all bank accounts by most respondents (97%), and the reconciliations were reviewed by someone other than the preparer in most cases (95%). Petty cash was not often used by the churches with only 30% of the respondents reporting having such accounts. When used, these accounts were reconciled and replenished at least weekly by 56% of the respondents.
In terms of financial reporting, most churches (93%) ensured that the pastor or close family member was not involved in the accounting process. A number of churches (62%) had an independent party such as a certified public accountant review their financial statements at least annually, but only 57% had an actual audit performed. When asked if the financial statements were prepared in accordance with generally accepted accounting standards, 90% of the respondents agreed. However, only 43% of the respondents were familiar with Statement of Financial Accounting Standards Numbers 116 and 117, which governs nonprofit financial reporting.
In terms of their tax exempt status, 84% of the churches reported that they were tax-exempt, having obtained it on their own or through an umbrella organization. However, approximately ten of the churches are not tax-exempted which means that donations provided by individuals to these organizations might not be deductible for tax purposes. In terms of payroll processing, 72% of the respondents prepared their payroll in-house while 12% used a third party service provider such as Automated Data Processing. Most were current with their payroll filings and payments with a large majority (78%) not incurring any penalties in the last two years due to delinquent payroll tax returns or payments. However, 5% or approximately three churches did incur financial penalties due to late filings which might indicate that churches may not be aware of the filing dates for various payroll related documents. More information on financial management can be found in Table 3.
The purpose of the study was to determine if churches have adequate fiscal oversight of their operations and that adequate internal controls are in place over financial management. The results of the study suggest that corporate governance in churches in the area of fiscal oversight and financial management appears to be adequate. However there are many opportunities for improvement. Churches can do a better job of documenting their policies and procedures. In addition, they should communicate these policies and procedures to all employees. It also appears that church accounting personnel do not really know the requirements for preparing financial reports using generally accepted accounting principles. These personnel should consider attending a nonprofit course or seminar to increase their understanding of accounting standards relating to nonprofit reporting, especially Statement of Financial Accounting Standards No. 116, "Accounting for Contributions Received and Contributions Made" and Statement of Financial Accounting Standards No. 117, "Financial Statements of Not-for-Profit Organizations."
A number of factors in this study limit the generalizability of the findings. The findings are based on a haphazard sampling scheme, exclude religious institutions such as temples and mosques and were selected from only one state. In addition, there were a large percentage of respondents from one denomination. This denomination may have standing operating procedures for all its churches that could result in the research findings indicating better fiscal management results than actually exist. Although the findings may not be generalizable to all religious institutions across the Unites States, they do provide an indication of the need for increased awareness of the status of fiscal responsibility in the religious segment of the nonprofit environment and a need for more research in this area.
Future researchers may wish to continue this research in a different setting i.e., multiple states and diverse denominations, to determine if the results obtained in this study are consistent with other types of religious organizations. The scale used in the questionnaire did not possess the flexibility for a more detailed analysis. Future researchers may wish to design and use a more robust scale to continue in this research stream.
Anonymous (2004a). The IRS and Churches: Clergy Shouldn't Buy Falwell's Falsehoods, Church and State, 57(8), 13.
Anonymous (2004b). TV Preacher Uses Ministry Assets for High Living, Says Paper, Church and State, 57(10), 19-20.
Anonymous (2000). Koinonia's Former Head Arrested for Theft, The Christian Century, 117(11), 383.
Anft, M. & Williams, G. (2004a). Redefining Good Governance, Chronicle of Philanthropy, 16(21), 6-10
Anft, M. & Williams, G. (2004b). Internal Controls System May Prove Costly, Chronicle of Philanthropy, 16(21), 10.
Boston, R. (1999). When the Government Pays (Religious) Helping Hands, Free Inquiry, 19(1), 15- 16.
Davis, M. (2004). Faith Groups Express Belief in Federal Aid, Education Week, 23(40), 35-37.
Preston, C. (2005b). $40-million Committed for Scholarships; Other Gifts, Chronicle of Philanthropy, 17(8), 10.
Preston, C. (2005a). Church Receives $40-million From Family; Other Recent Big Donations, Chronicle of Philanthropy, 17(7), 20.
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Wilhelm, I. (2005).Grants Shaped Evangelical Movement, Chronicle of Philanthropy, 17(9), 13.
Williams, G. (2004). Accountability Law Spurs Charities to Make Changes, Chronicle of Philanthropy, 17(4), 29.
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Raymond J Elson, Valdosta State University
Susanne O'Callaghan, Pace University
John P Walker, Queens College--CUNY
Table 1: Church Profile 1. The denomination in which the church belongs: 6 Southern Baptist 1 Holiness 1 Free Will Baptist 1 Pentecostal 2 Non-denominational 1 Unitarian Universalist 2 Methodist 3 Protestant 2 Baptist 1 United Methodist 1 Interdenominational 32 Episcopal 6 Presbyterian 1 Lutheran 2. The membership level of the church as of the most recent year end 23 100 or less, 22 101-300 6 301-500 9 501 or more 3. The approximate gross revenue of the church (as reported to the membership) as of the most recent year end. 23 $100,000 or less, 19 $100,001-300,000 9 $300, 001-500,000 8 $500,001 or more 4. Number of individuals employed by the church, including the minister 42 (0-5 employees), 10 (6-10 employees), 3 (11-15 employees), 8 (16 or more employees) 5. Number of fulltime employees employed by the church: 50 (0-5 employees), 3 (6-10 employees), 3 (11-15 employees), 2 (16 or more employees) 6. The number of personnel who are part of the church's accounting staff: 59 (0-5 employees), 1 (6-10 employees), 0 (11-15 employees), 0 (16 or more employees) Table 2: Fiscal Oversight (Percentages) Yes No N/A 1 The church have a board of directors or 92 5 3 similar group (#2 -11 applies to those organizations with a separate board of directors) 2 The chairperson of the board of directors 71 29 is someone other than the minister 3 The minister/pastor is a voting member of 36 62 2 the board of directors 4 The board of directors hold regular board 95 4 1 meetings 5 Financial information and other significant 98 2 church activities are discussed with the board of directors on a regular basis 6 The board of directors include members who 87 13 are considered "financially literate" 7 The board authorize significant financial 93 7 transactions (such as leases, capital improvement projects) before they are incurred. 8 Board members are elected by the church 89 9 3 membership 9 Separate committees are established within 78 18 4 the board of directors 10 The board is involved in determining the 91 5 4 pastor's compensation package 11 Resolutions relating to the minister's 85 7 8 compensation, benefits and other significant matters are prepared annually and approved by the board 12 The church has formal policies and 75 25 procedures regarding significant activities 13 The church's policies and procedures are 62 20 18 documented 14 The policies and procedures are communicated 58 12 30 to all employees N/A--not applicable or no response was received. Table 3: Financial Management (Percentages) Yes No N/A The church operates with an annual operating 95 5 budget The budget is presented to and approved by the 94 6 board prior to the start of the church year (if the church has a budget) 1. Collections or offerings are maintained in a 92 5 3 secured environment before they are deposited 2. Bank reconciliation(s) are prepared of all 97 3 church bank accounts at least monthly 3. The reconciliation(s) is (are) reviewed by 82 8 someone other than the preparer 4. The church uses petty cash accounts 30 70 5. If used, petty cash accounts are reconciled 33 67 and replenished at least weekly 6. The pastor or close family member is involved 5 93 2 in the accounting process 7. An independent party (such as a CPA) reviews 62 37 1 the church's finances at least annually 8. An annual audit is performed of the church's 57 40 3 finances 9. Financial statements are prepared in 90 5 5 accordance with general accepted accounting standards 10. The church is familiar with Statement of 43 42 15 Accounting Standards Numbers 116 and 117 11. The church is a tax exempt organization with 67 28 5 its own 501(c)(3) exemption 12. The church is a tax exempt organization 17 18 65 through a separate or umbrella organization 13. The church has incurred penalties in the last 5 78 17 two years because of late filing or payment of payroll taxes and returns 14. The church is aware of the filing dates of 78 2 20 all payroll related documents (such as W-2s) N/A--not applicable or no response was received.…
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Publication information: Article title: Corporate Governance in Religious Organizations: A Study of Current Practices in the Local Church. Contributors: Elson, Raymond J. - Author, O'Callaghan, Susanne - Author, Walker, John P. - Author. Journal title: Academy of Accounting and Financial Studies Journal. Volume: 11. Issue: 1 Publication date: January 2007. Page number: 121+. © The DreamCatchers Group, LLC 2008. COPYRIGHT 2007 Gale Group.
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