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Financial accountability in religious organizations.

Financial Accountability in Religious Organizations

Recent headlines have been full of news about the financial mismanagement and difficulties of religious organizations, and local churches and small religious organizations have complained that the publicized scandals are hurting their contributions.

This article considers potential problem areas in several types of organizations, identifies oversight groups for each, presents suggestions for increasing accountability and some special procedures which auditors should follow are identified.

Religious Broadcasters

Religous broadcasters depend primarily on the dynamic personalities of one or only a few individuals. Broadcasters are often not subject to sufficient oversight by individuals without direct ties to the organization and therefore are most susceptible to mismanagement and difficulties. Also, expensive production and televising costs require a continuing emphasis on fund raising.

The Association of National Religious Broadcasters has begun trying to strengthen financial guidelines for its members. Another organization, the Evangelical Council for Financial Accountability (ECFA), has developed standards for responsible stewardship and fund raising. However, as has been widely publicized, PTL was a member of the ECFA until it voluntarily withdrew from membership. Consequently, the ECFA has begun relying less on audited reports and more on other information and surprise visits to the organizations.

Financial accountability can be improved by several measures. First, the organizations should have a board of directors composed of independent individuals, including some not directly connected with or interested in the organization. An annual audit (not simply a review) is mandatory. Audit reports and other financial reports should be more readily available to interested parties, including the press. Finally, donors should provide increased scrutiny and demand nothing less than total integrity.


Most churches are relatively small and rely on the honesty of individuals who receive or disburse funds. A good rule of thumb is that the church should practice the same good business procedures which any local business would follow. For the safety of the church and to protect individuals from criticism, an annual audit should be performed. An audit is relatively inexpensive, especially when compared to potential loss of funds and credibility from misappropriation.

The church board should exercise responsible financial control. Board members should remember they may have potential legal liability, especially if bylaws or denomination provisions are violated. If larger churches also produce radio or television programs, these programs should still be subject to the oversight of the board.

National or district offices of church denominations can aid local churches by requiring strict procedures and practicing strong oversight. The denominational offices should require annual audit reports and other financial reports and should require that local church officers explain unusual or large items. From the denomination's perspective, close attention should be directed to agency relationships created when churches pay money to the denomination for annuities, insurance, etc.

Para-Church Organizations

The para-church category includes a diverse group of organizations. Some have local chapters which are supervised by a national office. Others are independent organizations located at only one or a few locations. Activities of various para-church groups include mission support, educational activities, literature printing and/or distribution and social services. Para-church organizations can join the EFCA if they meet financial and reporting requirements.

National organizations with local chapters should provide specific guidance to the chapters. This could include providing appropriate forms, requiring detailed reporting and practicing sufficient oversight. Reporting similar to home office/branch accounting might be appropriate. Independent organizations should follow the guidelines discussed earlier for religious broadcasters, including independent boards, reporting to donors and good internal controls.

Audit Procedures

The Financial Accounting Standards Board (FASB) has responsibility for generally accepted accounting principles of religious organizations. However, primary authoritative support has been delegated to the AICPA through the audit guide, "Audit of Certain Nonprofit Organizations." Auditors should realize that audit procedures for religious organizations are often different from those required for business organizations. Unique characteristics of religious organizations include the following:

1. A volunteer governing board

with members often serving

for relatively short periods, 2. Limited funds, 3. A small number of staff

personnel, often prohibiting

appropriate segregation of

duties. 4. A mix of employees and

volunteers participating in

operations, and a budget

approved by the governing board.

The budget serves as

authorization for activities to be

carried out by the organization.

Special audit considerations of religious organizations include:

1. Focus on contributions. In

confirming contributions, the

auditor should look for

restrictions placed by the

donor. If contributions were

restricted, procedures should

assure that the organization

actually did record the

restriction and, when expended,

the restriction was fulfilled. 2. The auditors should direct

special attention to disbursements

and expenses. Amounts should

be budgeted (or approved) by

the board. 3. Fund balances should be

analyzed. Unrestricted fund

balances can only be designated

for specific purposes by board

action, not at the whim of

management or the

accountants. Restricted fund balances

must be accounted for

separately. Also, fund balances

should be analyzed to assure

that all revenues and expenses

are recorded as such. For

example, a payment of restricted

funds might simply be

recorded by reducing cash and

a restricted fund balance

without ever being recorded as

revenue and expense. 4. The auditor should verify that

good internal control is

maintained. Adequate separation

of duties may not be possible

if the organization has only a

limited number of staff

members. Because volunteers

usually work only for short

periods, good controls are

especially important. 5. Minutes should be reviewed

and appropriate personnel

questioned to assure that board

actions comply with the

constitution, chapter and/or

bylaws. 6. Situations in which the

organization acts only as agent

should be reviewed to assure

that transactions are recorded

properly and not as revenue

or expense. 7. The auditor should direct

special attention to "executive

bank accounts," organization

charge cards issued to

employees and management,

travel and entertainment

expenses, etc. Reasonable

compensation and spending

guideliness should be followed

so that the organization's

nonprofit status is not in

jeopardy with the Internal

Revenue Service.

Religious organizations can be fiscally responsible if they follow good business practices and common sense. Proper accounting procedures, an annual independent audit and increased scruting by donors and others are also essential.

Randal K. Edwards, CPA, PHD, is an assistant professor of accounting at Appalachian State University, has previously published in Taxation for Accountants and Taxation for Lawyers, and has audit experience with Ernst & Whinney.
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Article Details
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Author:Edwards, Randal K.
Publication:The National Public Accountant
Article Type:column
Date:Jun 1, 1990
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