“In God we trust” is a motto so important to the American culture that it is printed on our currency. As a religious organization, this motto means even more, but there is another popular motto that church administrators should learn: “trust but verify”.
The fact is many churches do not place a major focus on financial oversight, and that can create an opportunity for internal fraud. In general, church members trust each other, and rightfully so. But, trusting someone and allowing them unfettered access to church assets are two very different things. So, who is responsible for financial oversight within religious organizations, and how stringent of oversight should be performed?
Who is responsible for financial oversight within religious organizations?
The simple answer is ‘everyone’. But, taking this answer a step further, the responsibility ultimately lies on the Board of Directors of the church. However, when evaluating the two major functions of a church board, governance and faith-based activities, it becomes evident that some responsibilities are often overlooked.
Rob Faulk, a seasoned church administrator with vast experience in internal controls, states that he often “see[s] church boards that are strong in one area but challenged in the other […] dominated by mission but lack[ing] proper fiscal management. Others are strong operationally, but lack leadership support for the ‘why’ that drives the church’s vision and mission.”
Additionally, the reason the ultimate responsibility of financial oversight lies with the board is because all boards of non-profits have a fiduciary responsibility for organizational oversight. If you’re not familiar with the term ‘fiduciary’, it is most commonly mentioned in the media when describing certain financial advisors who also maintain a fiduciary responsibility to their clients. This is because fiduciary is defined as someone who “holds a legal or ethical relationship of trust with one or more” interest parties.
So, in general, a fiduciary must act in the best interest of the people they represent. In a non-profit organization, such as a church, the board is the bearer of this fiduciary responsibility and therefore should properly oversee all operations, including finances, to protect the members of the church.
Finally, according to Mr. Faulk, the reasons for the aforementioned shortfalls in church governance can usually be attributed to either improperly structured management or insufficient resources to conduct proper monitoring. But in some cases, these responsibilities are simply overlooked. So how should a church modify their organizational and management structure to ensure they are performing adequate oversight?
What steps can be taken to improve financial oversight within churches?
The good news is there are a multitude of time-tested methods you can implement that can greatly improve the board’s ability to oversee the church’s finances. But first, church administrators and board members should have a strong grasp on what information should be monitored.
What financial information should the church board monitor?
According to Mr. Faulk, there are some general financial areas that church boards should monitor. In his view, the board should be responsible for:
- Protecting the overall health of the church by continuously analyzing financial condition and trends
- Maintaining adequate levels of reserves
- Safeguarding investments
- Ensuring internal controls are in place to prevent fraud and protect assets
The board should also pay careful attention to various financial ratios and measurements, seeking to answer questions like these:
- Are we using our financial resources as efficiently as possible?
- How does our church compare with similar churches?
- What financial indicators should we monitor, and how?
- Are we financially healthy?
By taking steps to ensure these items are monitored and questions are answered, your board will be focused on the most important aspects of financial oversight. However, many church boards are not structured properly to meet these obligations.
How can you structure your church board of directors to help ensure adequate financial oversight?
For some religious organizations, the structure of their board is pre-defined by the guidelines mandated by their denomination. Other churches do not have guidelines, so their boards can have many different structures and components.
According to Mr. Faulk, to make sure your board is structured properly to ensure adequate financial oversight you need some critical components:
First, the most important requirement is that your organization has the proper financial expertise in key positions. These members should have adequate knowledge of financial statements and internal controls. Experience with non-profit financials can be especially beneficial. The lack of proper experience in key positions can lead to ineffective oversight.
Second, a board needs a finance committee and an audit committee. According to Mr. Faulk, these committees are sometimes combined, but they should be separate when possible since their functions are very different. Some states even mandate that these committees be separated. By separating these committees, you can avoid the situation where people are policing themselves.
Responsibilities of the church board finance committee:
The finance committee should hold the responsibility for the following:
- Financial Statements
- Appropriate Policies and Controls
Responsibilities of the church board audit committee:
An appropriately structured audit committee should hold the following responsibilities:
- Ensuring that management prepares and approves budgets in a timely manner
- Ensuring that management prepares financial statements that are without error and that financial statements are prepared and reviewed in a timely manner
- Ensuring that cash reserves are maintained as directed
- Providing oversight and assurance with regard to policies and controls
- Working with and supporting external auditors
By separating the audit and finance committees and assigning appropriate responsibilities to each, your church can gain assurance that its financial management and oversight activities are not in conflict with each other. In addition, separating these activities creates more positions with smaller workloads, so this may help in enlisting volunteers to take these positions. On the other hand, some organizations may not be large enough to have two separate committees, so in those cases, additional controls and oversight by other members of the board and management will be necessary.
By appropriately structuring your church board and its committees and monitoring the proper data, you can increase the effectiveness of your financial oversight activities. These basic steps can reduce the risk of internal fraud and help ensure the success of your congregation.
If you are looking to improve internal processes and reduce the workload on your church board and management, contact the American Deposit Management Co. At ADM, we leverage our proprietary fintech to provide various services to religious organizations that increase the safety and return on your congregation’s reserve funds. We can also implement advanced systems that lower the effort required by your members to run the church, thereby reducing costs and the opportunity for fraud.