Questions Church Boards Should Ask: A Financial Primer

Being a member of a church board entails numerous responsibilities, including ensuring the financial stability of the organization so it can accomplish its ministry. However, board members may not have strong financial skills or direction through policies about their role regarding church finances.

A lack of financial acumen can leave the church vulnerable to risks such as levies for failing to comply with Canada Revenue Agency (CRA) tax rules or becoming a target for fraudsters. To help safeguard your church, bring the following questions to your board and open a frank conversation around financial governance and what your board should take responsibility for. 

A LEARNING EXPERIENCE

To be most effective, approach the questions – and the answers – with an unbiased, open mind. This includes gathering evidence rather than assertions to avoid missing issues that could threaten the financial future of your church. Consider the following:

Who Authorizes Church Expenses?

The most important financial control in a not-for-profit organization is ensuring no expense can be paid by just one person. The requirement for having a second signing authority provides a high degree of transparency and accountability, reducing the risk of fraud or embezzlement. When reviewing your financial processes, it is important to ask probing questions to ensure the process of dual review is not circumvented through other means. 

• Does each signatory review the complete supporting documentation and understand the nature of the expenses as well as the implications on the church budget before signing the cheque?
• Is there ever a case where one signatory pre-signs blank cheques or signs without reviewing supporting documents?
• Is online banking set up and if so, do online payments require dual authorization?
• What is the process for approving expense reports?
• Are the right individuals involved such as those directly involved in leading the applicable ministry?
• How can the church pre-approve its expenses, rather than finding out after an individual has already paid an expense personally with the expectation of being reimbursed?

Are You Compliant with CRA Charities Regulations?

Charities regulations can be complex and board members should ask appropriate questions to ensure church staff and volunteers have considered the potential implications of proposed transactions or activities. Importantly, failure to file a charity return by deadline (six months after fiscal year-end) could result in a revocation of the charitable status of the church.

Some key principles to be aware of are:

• All cash disbursements must either accomplish the church’s stated charitable purpose, or be a gift to another registered charity.
• The charity must always control and direct the use of its funds.
• Members of a charity cannot receive benefits or preferential treatment by virtue of being a member.
• Possible violations of charities regulations can arise around donations, such as when a donor specifies what the donation should be used for, the church “flows through” a donation to another organization that is not a Canadian registered charity or a donation is returned.

Are payroll source deductions and GST (if applicable) submitted to Canada Revenue Agency?

Directors of an organization (board members) could be personally liable if payroll source deductions and GST are not paid to the CRA. As such, board members should request information to satisfy themselves all required CRA payments have been made, for example, by asking for a monthly sign-off from the appropriate staff member.

What designated donations are accepted, and how are they tracked?

If a church accepts a designated donation, trust law may bind the church to use the money only for the purpose stated by the donor at the time of making the donation. Does your church have a clear policy for designated donations / restricted funds?

What will you do if a person attempts to donate to a specific cause that is not an existing fund? Does the church have a policy about re-designating funds where a given need has been met and is this adequately communicated to donors? The parameters of each restricted fund should be documented in writing so you can communicate them clearly and consistently and preserve the original intent of the fund.

Important considerations include:

• What is the church’s accounting process for ensuring designated donations are tracked and applied to the cause for which they were donated?
• Should designated funds be moved into a separate bank account?
• How broad or narrow is the definition of the fund? For example, can missions donations be spent on travel and administrative expenses; can building fund donations be spent on renovations, rentals, etc.? 

Are church staff paid fairly?

Fair treatment of staff includes goes beyond financial compensation to matters such as clearly defined job descriptions, regular performance evaluations, and coaching for career development. Consider if staff receive the same compensation employees in related industries would expect, for example, pension and health care benefits, paid mileage and cell phone, standard vacation time and appropriate consideration of the total number of hours invested in to the job on a weekly basis. Ensure employment terms and conditions are properly documented in writing. 

Does the budget reflect the church’s mission, vision and core values?

Many churches have a written mission, vision, and core values. Consider your budget from this perspective to determine if financial resources are appropriately directed towards the various ministries and activities required to achieve your mission.

To what extent the budget can be used as a tool to support certain areas of the church that require growth towards maturity? Also evaluate the effectiveness of the various programs and / or staff positions in the church and consider if the level of financial investment in each ministry produces good results.

What level of financial reserves is appropriate?

Effective stewardship requires a balance between the healthy urgency of spending donations promptly on kingdom purposes and maintaining an appropriate reserve to ensure long-term financial stability. Challenges to these goals include leadership conflict leading to lower attendance and giving, as well as internal power plays for control over assets.

Some churches have a target level of financial reserves, expressed in terms of the number of months that savings alone could fund the ongoing expenses of the church. Churches that own a building should have a maintenance reserve – consider obtaining a professional reserve fund study to calculate how much you need, which is the approach taken by condo associations.

What is the impact of electronic giving?

Electronic giving may include debit cards, credit cards, online donations, e-transfers, and recurring pre-authorized debits. Accepting electronic donations increases the ease and convenience of giving and has a variety of implications the church board can address. Ask the following:

• Does the added convenience result in higher or more regular giving?
• What are the bank charges / online costs associated with various forms of electronic giving?
• How can electronic giving be designed to achieve similar results of an “offering count,” i.e. accuracy, accountability, transparency, anonymity and collection of appropriate information about the donations?

What is the financial health of the individuals who attend our church?

Studies indicate that only two to four percent of Christians tithe and many Canadians have considerable consumer debt and are living pay cheque to pay cheque. Consider strategies and resources to help your church members improve their personal financial health, and the impact this may have not only on their personal finances, but also the financial health of the church.

Should the financial statements be audited?

An audit provides a high level of accountability – to financial institutions if seeking a loan, to church members, as part of many churches’ bylaws and to satisfy grant requirements. For example, the Alberta Charitable Fundraising Act may require an audit by a CPA if fundraising solicited from the general public exceeds $100,000.

An audit can be conducted by an external chartered professional accountant (CPA) according to formal methodology, while some churches appoint an individual or small group of individuals to do a less formal review of the books and records and report back on their findings. 

What financial policies should we have?

The board is responsible to guide the organization, set out expectations and protect individuals involved. One way this is done is by overseeing and approving policies, examples of which can be found online or through denominational headquarters.

Church policies may include: role of the finance committee, budget, designated gifts, fundraising, building, benevolent and missions funds, love offerings, missions giving, authorization of and documentation of expenditures, credit cards, petty cash, bank accounts, payroll, financial records, financial reporting, review of financial records, document retention, ethical behavior and other matters.

Equally important are other non-financial policies, such employment-related polies to ensure the church complies with provincial employment standards.

Toward a Financially Sound Ministry

All successful businesses, including churches and other not-for-profit organizations, rely on strong financial practices to sustain growth and achieve their objectives. By asking the above questions and learning from the answers, you will help position your church to accomplish its ministry calling – now and for the long-term.

Darrell Wiens, Partner, provides tax planning and business advice to business owners and has served numerous churches and charities through board involvement and consulting services. Contact Darrell at 780.451.4406 or [email protected].