Financial Transparency

Financial transparency is an essential component of good stewardship and an effective way to minimize the temptation of greed. We explain the reasons why we believe churches should be transparent here. Below are a number of specific recommendations for how churches can improve their financial transparency. These principles are based on recommendations by leading advisory organizations, including the Evangelical Council for Financial Accountability, Independent Sector’s Panel on the Nonprofit Sector, and two of the most influential state associations of nonprofits. (Note that these organizations recommend the following principles in the context of all nonprofits.)

We believe churches should work toward adopting policies and procedures similar to those described below. Of course, we recognize that implementing many of these reforms will require some time.

1.    Churches should voluntarily abide by the same laws and IRS rules that govern all other tax-exempt organizations.

a. All other tax-exempt organizations are required to file Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code; and Form 990, Return of Organization Exempt from Income Tax.

b. The law requires that those forms to be made available to the public, which is the most significant element of financial transparency imposed on tax-exempt organizations – an element that, unfortunately, does not apply to churches.

In a 2003 unsigned editorial, Christianity Today urged that all Christian organizations – including churches – should operate with open books, urging churches to file the Form 990. The editors wrote:

Although churches … aren’t legally required to make financial statements available, they are morally obligated to do so. Private companies have some allowances for being opaque. Nonprofits receiving tax breaks and other public benefits do not.

Many church-based ministries (which, granted, are not legally required to send out Form 990) don’t understand this. “We are certainly accountable to our members and our God,” said the Potter’s House, led by T.D. Jakes, in response to its inclusion on [Wall Watcher’s] Transparency Watch list. Joyce Meyer Ministries similarly dismissed its inclusion, saying it might send out copies of its annual report—but not audited statements.  Or it might not. “If our management does not want to release that, then that is their choice,” said accounting manager Delanie Trusty. “We feel our donors are very informed.”

Such a response demonstrates shortsightedness, and ignores reality. As Wall Watchers founder Rusty Leonard says, “We are asking them to [send this information] because they are receiving money and, frankly, they are not acting as churches but are acting more like parachurch ministries.”

In the end, it doesn’t matter whether the law considers a ministry a church or a parachurch. Every Christian ministry has a higher obligation—to be transparent in all its doings, so in these especially suspicious times, no one will have reason to suspect it of walking in darkness.

“Open-book Ministry,” Christianity Today, Jan. 2003, p. 30-31.

Although the Evangelical Council for Financial Accountability (ECFA) officially opposes amending the law to require that churches file a Form 990, its standards state that financial transparency is a biblical requirement – implying that it should be as applicable to churches as to other non-church ministries.

Financial disclosure is not only an accepted, expected, and required form of accountability in society at large, but it also represents the even higher standard of openness for Christian organizations operating in the forum of the Church. It may be true that public disclosure of financial information is required, in part, to protect the donor public. While this is the reason most often given to justify governmental regulation, the reputation of the Christian ministry in general is at stake.

Public disclosure protects Christian ministry from the danger of claiming ownership of God’s gifts. It also protects us from the temptation to acquire assets as our lasting goal. Furthermore, the availability of financial statements promotes responsible Christian stewardship over assets as donors seek to make monetary investments in the work of the Kingdom. Simply put, Christian organizations provide current financial statements to anyone who submits a written request for them because it is the right thing to do.

ECFA Standard 5 – Transparency.

2.    Churches should provide financial information, including annual financial reports, and answer questions regarding finances asked by any donor or church member.

a. Annual financial reports need not be elaborate but should provide meaningful insight into the church’s finances so that donors can see how their money was spent.

b. Donors should be encouraged to ask questions and responses should be forthcoming.

Sources: BBB Wise Giving Alliance, Standards for Charity Accountability, Standards 11-12; ECFA Donor’s Bill of Rights; ECFA Standard 5 – Transparency; Internal Revenue Service, Governance and Related Topics – 501(c)(3) Organizations, Topic 5.A; Michigan Nonprofit Association, Principles & Practices Guide (Oct. 2009), page 19; Minnesota Council of Nonprofits, Principles & Practices for Nonprofit Excellence (May 2010), page 10; Panel on the Nonprofit Sector, Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations (Oct. 2007), Principle 7.

3.    Churches should explain how compensation is set for the pastor and employees, and it should provide compensation data to the congregation.

a. Churches, like other tax-exempt organizations, are prohibited by law from paying more than reasonable compensation for services. For that reason, the church must carefully adhere to IRS guidance in setting compensation. Doing so usually requires that the compensation paid be no more than that paid at similar organizations.

b. All other tax-exempt organizations are required to disclose salaries paid to officers on their Forms 990, which is important information for donors evaluating how well a charity stewards its resources. We see no reason why churches should be exempt from this requirement.

Sources: BBB Wise Giving Alliance, Standards for Charity Accountability, Standard 12; Internal Revenue Service, Governance and Related Topics – 501(c)(3) Organizations, Topic 4.A.

4.    Churches should have written policies and procedures regarding reimbursement of expenses. These procedures should include a sound system of checks and balances to minimize opportunities for theft or embezzlement.

a. Policies should articulate what expenses are reimbursable and should ensure that those policies conform with the law and IRS regulations.

b. Procedures should include a requirement for receipts and should ensure that the individual requesting reimbursement is separate from the individual approving it.

Sources: ECFA Standard 4 – Use of Resources and Compliance with Laws; Michigan Nonprofit Association, Principles & Practices Guide (Oct. 2009), page 9; Minnesota Council of Nonprofits, Principles & Practices for Nonprofit Excellence (May 2010), page 14; Panel on the Nonprofit Sector, Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations (Oct. 2007), Principle 25.

5.    Churches should have their financial statements regularly audited and should make the results of those audits available to the congregation.

a. Many larger churches should be able to afford the cost of annual audits.

b. For smaller churches, an annual audit might not be possible, but semiannual audits should be conducted. It is also possible to seek pro bono assistance for an annual audit – some accounting firms may be willing to offer their services for free.

Sources: BBB Wise Giving Alliance, Standards for Charity Accountability, Standard 11; ECFA Standard 3 – Financial Oversight; Michigan Nonprofit Association, Principles & Practices Guide (Oct. 2009), page 9; Minnesota Council of Nonprofits, Principles & Practices for Nonprofit Excellence (May 2010), page 14; Panel on the Nonprofit Sector, Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations (Oct. 2007), Principle 21.

6.    Churches should join the Evangelical Council for Financial Accountability (ECFA).

The ECFA is an accreditation agency that ensures its members comply with principles of good governance and financial transparency. Although, due to the expense involved, membership may not be practical for the smallest churches, it is certainly feasible for larger churches. For small churches, given the choice between joining ECFA and filing Forms 1023 and 990, we believe that the public transparency and accountability provided by complying with IRS requirements are superior to that provided by the ECFA.

7.    Churches should adopt a conflict of interest policy.

a. Conflicts of interest occur when a board member or pastor is in a position where his or her ethical duties to the church may be compromised by his or her personal interests.  For instance, such a situation may arise when considering whether to hire a relative or contract for services with a company owned by a family member.

b. When conflicts of interest occur, it is important that the conflict—or potential conflict, or the appearance of conflict—be disclosed to the church and that the conflicted individual recuse himself or herself from all deliberations relating to the conflict.

c. The IRS posts a sample Conflict of Interest Policy on its website.

Sources: BBB Wise Giving Alliance, Standards for Charity Accountability, Standard 5; ECFA Standard 6 – Compensation and Related-Party TransactionsInternal Revenue Service, Governance and Related Topics – 501(c)(3) Organizations, Topic 4.B; Michigan Nonprofit Association, Principles & Practices Guide (Oct. 2009), page 13; Minnesota Council of Nonprofits, Principles & Practices for Nonprofit Excellence (May 2010), pages 8, 15; Panel on the Nonprofit Sector, Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations (Oct. 2007), Principle 3.

8.    Churches should adopt a whistleblower protection policy.

a. Whistleblower policies protect from retaliation those employees who report in confidence to the Board suspected financial impropriety or other misdeeds.

b. Employees should be encouraged to report any malfeasance directly to the Board.

Sources: Internal Revenue Service, Governance and Related Topics – 501(c)(3) Organizations, Topic 4.G; Michigan Nonprofit Association, Principles & Practices Guide (Oct. 2009), page 9, 19; Minnesota Council of Nonprofits, Principles & Practices for Nonprofit Excellence (May 2010), page 14; Panel on the Nonprofit Sector, Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations (Oct. 2007), Principle 4.

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