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Zondervan Church and Nonprofit Tax and Financial GuideFor 2004 Returns
By Dan Busby
ZondervanCopyright © 2004 Dan Busby
All right reserved.
Chapter OneFinancial Accountability
In This Chapter
Accountability to an independent Accountability to donors board
The public has high expectations of religious organizations. Day after day, thousands in the nonprofit community work tirelessly and selflessly to address physical and spiritual needs worldwide, only to find the public casting a wary eye on them due to the highly publicized misdeeds of a few. Donors recognize that enormous needs exist and they want to respond generously to those needs. But they also want to be sure that optimum use of their sacrificial gifts is employed by the charities they support. There is no acceptable alternative to accountability.
For some nonprofit organizations, accountability issues may relate to complex issues of private inurement or conflicts of interest. Charities receiving significant contributions in the aftermath of a disaster may face the challenge of spending donations within donor expectations. In other organizations, the issues may be as basic as whether to accept a gift that appears to be a pass-through contribution for the personal benefit of a designated individual.
Financial accountability is based on the principle of stewardship. A steward-manager exercises responsible care over entrusted funds. Good stewardship rarely occurs outside a system of accountability.
Financial accountability is the natural outgrowth of proper organizational leadership. Providing clear, basic explanations of financial activity starts with the detailed record of transactions and evolves to the adequate reporting to donors and boards.
U.S. laws provide special tax treatment of religious and charitable institutions. But these laws generally result in only minimal regulation of charities. Churches, in particular, are not required to annually disclose financial data to the federal government. So, disclosure is often voluntary. A charity that refuses to disclose its finances is shortchanging the public from which it derives its support. It also causes suspicions about how it is using the financial resources at its disposal.
Being accountable to an organization that promotes stewardship principles often enhances accountability. The organization that provides leadership in the area of financial accountability to the most Christian organizations is the Evangelical Council for Financial Accountability (ECFA). With over 1,140 members, ECFA has established standards relating to proper accounting, an independent and responsible volunteer board of directors, full disclosure of finances, and fair treatment for donors. Their program of random site visits to its members adds credibility to their accountability process.
Accountability to an Independent Board
The importance of an active, informed board cannot be overemphasized. Even minor board neglect, left unchecked, can eventually intrude upon the accountability and effectiveness of the ministry. In contrast, the active informed board will hold to the mission, protect the integrity of ministry objectives, establish adequate board policies, and ensure consistent adherence to these policies.
Finding a proper balance between the staff leadership of a charity and the board is fundamental. Any charity with too powerful or too weak a leader is a charity in trouble. When executive leadership is too strong, it may be difficult for the board to provide adequate governance over the charity. Conversely, where executive leadership is weak, boards or one or more board members often inappropriately move in and take over.
Can your organization's leadership be challenged and voted down? Are the board members permissive and passive or involved and active? Are your values and policies clearly articulated? Are they operative in the organization daily? Are annual evaluations, based on pre-determined goals, made of the pastor(s) or the nonprofit chief executive officer (CEO)?
A board should generally meet at least semiannually. However, meetings held too frequently often result in the inappropriate involvement by the board in management issues. Meetings should be more than listening to the CEO's report and rubber-stamping a series of resolutions prepared by the CEO.
ECFA members must have a board of not less than five individuals. A majority of the board must be other than employees or staff, or those related by blood or marriage, to ensure independence. Even when employee membership on the board is slightly less than a majority, the independence of the board may be jeopardized. Employees often lack independence and objectivity in dealing with many board-level matters. While the CEO is often a member of an organization's board of directors, department heads are generally not members of the board.
Boards should develop a cyclical pattern of self-evaluation. The purpose of self-assessment is to individually and collectively improve board performance. It can take a variety of formats from soliciting feedback from individual board members about their contributions to the board's performance, to evaluating the effectiveness of time spent together as a board.
Recording board actions
The actions of an organization's board and its committees should be recorded by written minutes, including the signature of the group's secretary, prepared within a few days after the meeting concludes. The minute books of some charities are almost nonexistent. Minutes of the most recent board meeting often appear to be placed in proper written form on the eve of the succeeding board meeting. Such lack of organization can be indicative of weak board governance and may leave a poor paper trail to document the board's actions.
The actions of an organization's board typically include the approval and revision of policies that should be organized and printed as the body of board policies. These policies, extracted from the board minutes, should be revised after each board meeting if new policies are adopted or previously existing policies are revised.
ECFA members must have an independent annual audit prepared according to generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP).
Here is what to look for from your audit firm:
* A firm thoroughly knowledgeable about current accounting standards and one that understands your segment of Christian nonprofits.
* A firm that routinely prepares value-added management letters for their audit clients.
* A firm that helps you reduce your audit fee.
* A firm that understands your accounting system.
When an organization has an external audit, the board or a committee consisting of a majority of independent members should review the annual audit and maintain direct communication between the board and the independent certified public accountants.
If a charity does not have an annual external audit, an internal audit should be performed using written procedures (see pages 148-52).
Independence is the cornerstone of the auditing profession. The independent auditor should have no ties to management and no responsibility for governance or finance. The public can place faith in the audit function because an auditor is impartial and recognizes an obligation of fairness.
An annual review of the local church minister's or nonprofit organization executive's compensation package is vital. The review should focus on all elements of pay, taxable and nontaxable, in addition to reviewing performance and establishing performance objectives and criteria.
Pay and fringe benefit packages should be determined by an objective evaluation of responsibilities, goals reached, and available resources. A comparison with positions in other organizations may be helpful. National salary surveys may provide meaningful data such as National Association of Church Business Administrators Church Staff Compensation Survey and Christian Management Association Salary Survey. The approved compensation package should be documented in board and/or subcommittee minutes.
With increased scrutiny on nonprofit salaries (see chapter 3), it is important that compensation amounts be accurately stated. Gross pay may include the following elements (some taxable and some tax-free or tax-deferred):
* Cash salary
* Fair rental value of a house, including utilities, provided by the organization
* Cash housing or furnishings allowance
* Tax-deferred payments
* Value of the personal use of organization-owned aircraft or vehicle
* Value of noncash goods and services
* Cash bonuses
Reasonable salary and fringe benefits, especially for the highest paid employees of a charity, should be carefully documented. The intermediate sanction regulations provide penalties for "excess benefit transactions." Examples of such transactions include unreasonable salaries or bonuses to key employees and excessive travel expenses or other perks.
The organization should prepare a detailed annual budget consistent with the major classifications in the financial statements and approved by the board. The budget should allow meaningful comparison with the previous year's financial statements.
Responsibility for budgetary performance should be clearly assigned to management as appropriate (for example, department heads, field directors, and so on). The chief financial officer or treasurer of an organization is normally responsible for budgetary enforcement and reporting. For more information on the budgeting process, see page 146.
Conflicts of interest and related-party transactions
Fairness in decision making is more likely to occur in an impartial environment. Conflicts of interest and related-party transactions are often confused. However, they are clearly different concepts.
The potential for a conflict of interest arises in situations in which a person is responsible for promoting one interest at the same time he or she is involved in a competing interest. If this person exercises the competing interest over the fiduciary interest, he or she is guilty of conflict of interest. Always avoid conflicts of interest.
Excerpted from Zondervan Church and Nonprofit Tax and Financial Guide by Dan Busby Copyright © 2004 by Dan Busby. Excerpted by permission.
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