Determining Financial Policies for Your Church

Does our church need a whistleblower policy? Is our conflicts-of-interest policy adequate? Determining which policies to create—and appropriately crafting them for a specific church—is an exercise that requires discernment. A policy that is not appropriate for a particular church, or a policy that is poorly drafted, may create more problems than it solves.

Important considerations before adopting a particular policy

In determining whether a church’s board should adopt a particular policy, the church should consider several factors. Among them are:

• Whether the policy would be helpful in ensuring compliance with the law,
• Whether the policy could help protect the church or its constituents,
• Whether the policy will enhance the effectiveness of the church in carrying out its mission and purpose, and
• Whether the policy fosters confidence and trust on the part of congregants or members.

Additionally, many key areas of day-to-day financial operations can be governed by staff-developed procedures without the need for board-adopted policies. For example, staff can adequately create and oversee procedures for reimbursing business expenses, managing accounts receivable collections, and implementing specific internal control practices.

Philosophically, some churches strive to minimize the number of formal policies they adopt. Once a policy is adopted, it requires monitoring and maintenance to ensure that the policy is complied with and that it is kept up to date.

Additionally, an argument can be made that the more policies a church has, and the more specific those policies are, the greater the risk of failure to comply with those policies. From a risk-management perspective, having a policy in place and failing to comply with it can sometimes create more exposure to liability than if the church did not adopt the policy in the first place.

But every church will benefit from certain financial policies. They usually can be categorized into two groups:

• Policies that every church should probably have, and
• Policies that churches should have if certain factors are present.

This article will explore both categories further.

Policies every church should probably have

Budget administration policy

Given the significance of the budgeting process for a church, provisions for approving and administering a church’s budget are often a component of the church’s bylaws. Whether in the bylaws or in a separate policy approved by the board, a church should have an authoritative document governing the approval and administration of its budgets.

A well-written policy will address approval and administration of the church’s budgets for operations, capital expenditures, debt principal reduction, and possibly auxiliary activities. Among other important provisions, the policy should specifically set the process for addressing and approving budget overages.

Conflicts-of-interest policy

A conflicts-of-interest policy addresses scenarios in which a person on the governing body (board) or otherwise in a position of leadership may benefit financially from a business arrangement or transaction involving the church. That can happen, for example, if the church buys goods or services from the leader, from his or her company, from one or more of his or her family members, or from any of their companies. Other examples include selling items to one or more of these related parties, renting property to or from a related party, and so on.

For good reason, federal tax law restricts the terms of certain transactions between tax-exempt churches and their leaders (or parties related to their leaders). Violations of federal tax law in this area can have dire consequences—not only for the church but for the individuals involved in the transactions and the individuals who approve the transactions. (See chapter 9 in Church Finance for more information about this important area of tax compliance.)

Additionally, state nonprofit corporation laws also typically provide for adverse consequences if a nonprofit corporation engages in an improper transaction with a related party. Further, transactions between a church and its “insiders” can easily result in greater public scrutiny for the church and adverse public relations.

Sometimes, a related-party transaction may be economically advantageous to a church. For example, a board member may sell property to the church for less than its value in order for the church to build a necessary new facility. Even when a related-party transaction is economically advantageous on its face, the church should consider whether public perception of the transaction will be positive.

A well-drafted conflicts-of-interest policy prescribes how a church and its leaders are to address potential business arrangements in order to ensure that they are proper and in the best interests of the church.

Executive compensation-setting policy

Compensation arrangements for a church’s top leaders have characteristics similar to the related-party business transactions addressed above in the description of conflicts of interest. A leader should never be involved in the decision-making process with respect to his or her own compensation.

As with related-party business transactions, federal tax law sets forth parameters for permissible executive compensation by tax-exempt churches. As with other types of related-party transactions, violations in the arena of executive compensation can have dire consequences.

A well-drafted executive compensation policy prescribes the process for setting executive compensation and documenting the process, along with the data supporting the decision.

Dishonesty, fraud, and whistleblower protection policy

While it might seem obvious, it is a good idea to have a policy that specifically prohibits illegal activity, fraud, and other financial improprieties. Such a policy removes any doubt about whether such conduct in a church is permissible.

A dishonesty, fraud, and whistleblower protection policy both prohibits improper activity and prescribes the process by which an employee can report apparent improprieties. It also establishes the manner in which a church addresses such reports. A provision of the Sarbanes-Oxley Act of 2002, a federal law, prohibits retaliation by employers against workers (“whistleblowers”) for reporting certain improprieties. A well-drafted policy will help a church avoid violating this law as well as controlling state law.

Here is a sample policy on dishonsety, fraud, and whistelblower protection:

Ethical and Legal Standards for Conduct

[Insert church’s name here] requires all of its directors, officers, and employees to observe high standards of business and personal ethics in the conduct of their duties and responsibilities. As employees and representatives of the Church, we must practice honesty and integrity in fulfilling our responsibilities and comply with all applicable laws and regulations.

Reporting Responsibility

It is the responsibility of all directors, officers, and employees to report actual or suspected acts of dishonesty, fraud, or illegal activity in accordance with this policy.

No Retaliation

No director, officer, or employee who in good faith reports a matter described in the preceding paragraph shall suffer harassment, retaliation, or adverse employment consequence. An employee who retaliates against someone who has reported a matter in good faith is subject to discipline up to and including termination of employment. This policy is intended to encourage and enable employees and others to raise serious concerns within the Church prior to seeking resolution outside the Church.

Reporting Violations

The Church maintains an open-door policy and suggests that employees share their questions, concerns, suggestions, or complaints with someone who can address them properly.

In most cases, an employee’s supervisor is in the best position to address an area of concern. However, if you are not comfortable speaking with your supervisor or you are not satisfied with your supervisor’s response, you are encouraged to speak with someone in the Human Resources Department or anyone in management whom you are comfortable approaching.

Supervisors and managers are required to report actual or suspected acts of dishonesty, fraud, or illegal activity to the Church’s Compliance Officer, who has specific and exclusive responsibility to investigate all reported violations. For suspected fraud, or when you are not satisfied or uncomfortable with following the Church’s open-door policy, individuals should contact the Church’s Compliance Officer directly.

Compliance Officer

The Church’s Compliance Officer is responsible for investigating and resolving all reported complaints and allegations concerning actual or suspected acts of dishonesty, fraud, or illegal activity and, at his or her discretion, shall advise the Executive Director and/or the audit committee.

The Compliance Officer has direct access to the audit committee of the board of directors and is required to report to the audit committee at least annually on compliance activity. The Church’s Compliance Officer is [insert title of designated Compliance Officer; for example, the chair of the audit committee]. [Note: If a church does not have an audit committee or its equivalent, change the reference to the finance committee or the board of directors itself.]

Accounting and Auditing Matters

The audit committee of the board of directors shall address all reported concerns or complaints regarding corporate accounting practices, internal controls, or auditing. The Compliance Officer shall immediately notify the audit committee of any such complaint and work with the committee until the matter is resolved.

Note: If a church does not have an audit committee or its equivalent, change the reference to the finance committee or the board of directors.

Acting in Good Faith

Anyone filing a complaint concerning actual or suspected acts of dishonesty, fraud, or illegal activity must be acting in good faith and have reasonable grounds for believing the information disclosed indicates a violation of the Church’s policy. Any allegations that prove not to be substantiated and which prove to have been made maliciously or knowingly to be false will be viewed as a serious offense subject to disciplinary action.

Confidentiality

Violations or suspected violations may be submitted on a confidential basis by the complainant or may be submitted anonymously. Reports of violations or suspected violations will be kept confidential to the extent possible, consistent with the need to conduct an adequate investigation.

Handling of Reported Violations

The Compliance Officer will notify the sender and acknowledge receipt of the reported violation or suspected violation within five business days. All reports will be promptly investigated and appropriate corrective action will be taken if warranted by the investigation.

Caution. No church should simply adopt a sample policy as their own without carefully evaluating its provisions and modifying or replacing them as necessary and appropriate for the church’s unique circumstances. In adopting language for a particular policy, churches should consult legal counsel experienced in church law to ensure it is appropriate for the church.

Document retention policy

The federal Sarbanes-Oxley law includes provisions prohibiting the destruction or falsification of documents subject to certain federal proceedings. Additionally, federal tax law and other federal and state laws allow regulatory authorities to examine the records of churches for various reasons (compliance with employment law, employee benefits law, and so on). Such laws also require churches to maintain appropriate records related to compliance with the laws. It is important for churches to maintain records that may be required to be produced in the event of an IRS or other regulatory examination.

Attorneys generally advise churches to adopt a document retention policy prescribing the types of records to be maintained and the duration of time that they will be maintained. In some cases, attorneys specifically advise that such policies require destruction of documents after the applicable retention period.

Donor privacy policy

In the current era of pervasive spam emails and data breaches, donors to churches increasingly want to know how their data will be used and protected once it is provided to the church. It is considered a best practice in the nonprofit sector to have a donor privacy policy and to make that policy readily available to donors.

Key elements of a donor privacy policy include informing the donor as to what kinds of information is gathered, how the information is used, whether it will be shared with others and under what terms, and how the donor may opt out of certain aspects of the church’s use of the data.

Donor privacy policies are, by their nature, specific to the church and its use of donor and member information. For example, some churches publish membership directories or similar resources and others do not.

Policy requiring board approval for the issuance of debt and other financial obligations

Many churches have provisions in the bylaws that require the board (or even membership) to approve the issuance of any debt above a certain threshold or the entering into any contractual obligation (e.g., a lease) to make ongoing payments in excess of a certain threshold. That is a good practice. An alternative to having such a provision in the bylaws is for the board to adopt a policy with such requirements. A bylaws provision or policy requirement could be worded along these lines (of course, the provisions should be tailored to the governance model of the particular church):

Board approval is required for the issuance of any debt instrument with a principal amount in excess of $__________; for permitting any encumbrance, mortgage, or lien on any property or asset of the church; or for entering into any contractual commitment not included in a board-approved budget to make ongoing payments (e.g., lease payments) totaling more than $__________.

Note: If the board wishes to require a supermajority of the members of the board to approve such commitments, such a requirement should be included in the bylaws. For example, the board may wish for such commitments to be approved by at least 75 percent of the board members currently holding office, as opposed to simply a majority of board members present at a meeting at which there is a quorum.

Policies churches should have if certain factors are present

Gift acceptance policy

A gift acceptance policy addresses a church’s practices for evaluating atypical gifts. Examples would be gifts accompanied by naming rights restrictions (e.g., that a particular building be named after the donor), gifts with restrictions not accommodated by existing restricted funds, gifts of real estate, gifts of personal property, gifts of ownership interests in privately held businesses, gifts of stock in foreign entities, and so on.

The policy should address what parties or groups in the church have authority to evaluate and accept gifts covered by the policy and the factors or criteria to be considered in making such decisions.

A gift acceptance policy is appropriate for churches that receive atypical gifts with some frequency. Even churches that rarely receive such gifts may benefit from such a policy.

Executive expense reimbursement policy

A well-drafted expense reimbursement policy will describe who is covered by the policy, parameters for expenses that will be paid or reimbursed by the church, and documentation requirements. For example, some churches adopt policies prohibiting payment or reimbursement for alcohol, first-class travel, room service, movies, or other items. Whether a church formally adopts such a policy or not, it should, of course, maintain practices that comply with applicable tax law.

Other policies

The policies described in this article are not intended to constitute an exhaustive list of financial policies that may be appropriate for a church board to adopt. Depending on the specific circumstances, additional policies may be helpful or even necessary. Other policies that may be considered include, but are not limited to:

• Any policies required as a matter of law. The church’s legal counsel can help determine what specific policies may be required as a matter of law. (For example, federal tax law requires private, nonprofit, tax-exempt schools, including those operated by churches, to adopt and apply a policy of racial nondiscrimination.)
• Policy for spending restricted funds. In order to avoid misunderstandings and possible conflicts, churches that receive significant contributions restricted for particular purposes may benefit from a policy that clearly delineates who in the church has the authority to spend the restricted funds.
• Investment policy. Churches with significant investment portfolios should have an investment policy clearly describing the church’s investment risk tolerance and specific parameters for investment portfolio allocation. Churches should ensure that, among other things, their investment policy and practices are in conformity with applicable state law. Investment policies are, by their nature, specific to the church, its risk tolerance, and its investment objectives.
• Joint venture policy. For churches that engage in joint venture activities with for-profit companies, a joint venture policy may be necessary to ensure compliance with applicable tax law. Churches considering entering into joint venture arrangements should do so only under the advice of appropriately experienced legal and tax counsel.

This article is adapted from Church Finance by Michael E. Batts. Church Finance includes a number of sample policies.