Church leaders encounter many demands in carrying out their daily duties, so paying careful attention to factors that may compromise a church’s financial integrity can often take a back seat to more immediate issues. However, the cost of compromising that integrity can be steep. Here are five ways church leaders can maintain financial integrity:
- Good Governance
Maintaining financial integrity within the church begins at the top, with leadership consistently applying strict controls over financial, legal, and operational functions. Church leaders must fully educate themselves on their fiduciary duties of loyalty, care, and obedience as well as exempt organization responsibilities that, if breached, could endanger the church’s exempt status. Church leaders are also responsible for defining the roles and responsibilities of the board, starting with a governance framework that is set forth in board policies.
- Effective Financial Controls
Financial integrity depends on financial controls that detect and help prevent problems. Effective financial controls within a church can include:
- Creating policies and procedures that clearly delineate the roles and responsibilities of everyone within the church and monitoring those to ensure compliance;
- Routinely assessing the exposure to risk so the church is ready to act in case of financial mismanagement, a security violation, a poor act by a staff member, or any other circumstances that present an organizational risk;
- Conducting independent financial audits and legal evaluations to protect the church’s tax-exempt status;
- Maintaining sufficient financial resources to deal with unforeseen circumstances (e.g., COVID-19); and
- Ensuring that church leaders have timely, accurate, and reliable financial reports to help with decision-making.
- Strict Oversight
while a board member or director may delegate their tasks to others in the organization, such as staff members or committees, or even to people outside of the organization, such as professionals, they must do so with a proper amount of oversight. This oversight can take various forms. Often it will be handled via standardized procedures. These may include mechanisms such as reviewing financial statements and putting in place discrete governance policies, such as executive compensation policies, reimbursement policies for travel and expenses, conflict of interest policies, and whistleblower policies, among others. For such policies and procedures to suffice as oversight, the board or director must perform due diligence to ensure that the policies or procedures are being followed.
- Appropriate Compensation
The IRS has parameters for what is permissible for tax-exempt churches in setting executive compensation levels. An executive compensation policy for the church should set the process for determining and documenting executive compensation. Recently, the IRS issued its annual program letter that detailed the agency’s areas of focus in 2021. One of those areas is excess compensation by tax-exempt organizations.
- Risk Management
While few churches could have anticipated the unprecedented fallout from COVID-19, it has actually offered us all lessons on the relevance of preparing for the unknown. Assessing the most vulnerable areas of your church or nonprofit will help you establish how to prioritize potential threats. For instance, if your organization has youth programs, you will certainly need to have clearly worded abuse prevention policies in place in addition to background testing and training for volunteers or workers managing this program. Risk management should be a part of every supervisor’s duties so the magnitude of mitigating risk permeates the organization.
Provident Law’s nonprofit attorneys can help churches and religious organizations and their boards. We stand ready to counsel and serve churches, charities, and foundations, as well as private schools, colleges, universities, and other types of nonprofit organizations—providing broad transactional and general counsel services in Arizona and surrounding areas. Contact us to learn more.