Transparency In Ministry

In light of the current spotlight on televangelists let's review appropriate expenses and required documentation/substantiation.

For an expense to be an appropriate expense for a ministry, the expense must be ordinary and necessary, which in general requires a showing that the expense was incurred principally for and has a reasonably close relationship to the tax-exempt purpose of the church or ministry.

Additionally, proper documentation must be made for the expenditure. For meals, the following should be recorded:

> the amount and a description of each separate expenditure;
> the time and place the meal was provided;
> the business purpose of the activity, including a description of any business benefit derived or expected, and the nature of any business discussion with the person entertained; and
> the business relationship to the person or persons entertained, which may be indicated by reference to name, title, occupation, or other designation sufficient to establish the relationship.

The above documentation should be contemporaneous.

See post #2 for substantiation requirements for lodging and incidental expenses.

Setting the tone at the top is a key requirement of board governance. Management must establish standards of conduct and follow them. These standards contain the values, philosophy and mission or the organization.

How does this impact the Organization's audit?

Recent changes to the audit standards require the auditor to evaluate the “control environment”. This term is one of the five elements of internal control as defined by the Committee of Sponsoring Organizations (COSO) in the early 1990’s. The Sarbanes Oxley Act of 2002 also encompasses this concept in federal legislation directed at public companies. Those charged with governance (boards) and management (senior pastors) should ask themselves how have they conveyed their attitudes regarding fraud and ethical values to others within their church or ministry. This is a question your auditors will be asking you.

For several years non-profits have been trying to define the “tone at the top”. What is this and what is expected from those charged with governance?

Athletes are not the only people that have to worry about being called a role model. All of us are role models to some degree. Our children watch us intently and learn from our actions and words. Our actions and words also influence the ideas and actions of others outside the home. Our co-workers watch us react to our bosses and the company moral may be influenced by our behavior. Everyone should act ethically and those individuals that are charged with leading public, private and nonprofit organizations are held to an even higher standard and expectation. These individuals set the Tone at the Top and that tone may determine the success or failure of an organization.

Management must establish standards of conduct and procedures for monitoring the effectiveness of those standards. These standards contain the values, philosophy and mission of the organization. These rules should be clear, concise and communicated. Ultimately they must be understood and embraced by management and employees. These rules apply to all employees equally without exception. There should be no preferential treatment.

Many organizations or entities like to call a particular policy “fair,” but quickly learn that fairness is subjective and what is fair to one may not be “fair” to all. Determining and defining "fair standards" is a critical part of executive management and may require legal involvement.

The board (those charged with governance) and management must lead by example, (ie., walk the walk, talk the talk.) If they are complacent in their approach, their employees may assume complacency. If management has a poor attitude, behaves unethically and disregards the mission of the firm, then their employees may follow their lead. Management has the fiduciary responsibility to lead with expected accountability. The board and management must realize that, as leaders, they are role models (operationally and administratively) for their organization. This role is defined by a guiding influence on the mission of the organization. This includes a pervasive attitude for developing, monitoring, and evaluating internal and operating controls.

Employees (valuable organizational resource) are a key function of the internal control environment. Developing, monitoring and evaluating employees and their daily function will strengthen the internal control structure of an organization.

Setting the TONE at the TOP…it's the responsibility of those “charged with governance”. How does this impact the annual audit? See post #2 in this series.

In a financial statement audit performed in accordance with generally accepted auditing standards, the auditors are required to obtain a written letter from management that includes certain representations. In a July post, we discussed the reasons an external independent auditor would request their client to sign a management representation letter. In this posting, we discuss who should sign the letter.

The letter should be signed by those members of management with overall responsibility for financial and operating matters whom the auditor believes are responsible for and knowledgeable about, directly or through others in the organization, the matters covered by the representations in the letter. Such members of management normally include the chief executive officer and chief financial officer or others with equivalent positions in the entity.

If current management was not present during all periods covered by the auditor's report, the auditor should nevertheless obtain written representations from current management on all such periods.

In certain circumstances, the auditor may want to obtain written representations from other individuals. For example, he or she may want to obtain written representations about the completeness of the minutes of the meetings of stockholders, directors, and committees of directors from the person responsible for keeping such minutes. Also, if the independent auditor performs an audit of the financial statements of a subsidiary but does not audit those of the parent company, he or she may want to obtain representations from management of the parent company concerning matters that may affect the subsidiary, such as related-party transactions or the parent company's intention to provide continuing financial support to the subsidiary.

Please feel free to contact us if you have other questions.

An update to the "2007 Brings Another Form to File" blog I posted in June.

The IRS has announced that it began mailing educational letters to more than 650,000 small tax-exempt organizations that may be required to submit a new annual notice. Non-profit organizations that normally have no more than $25,000 of annual gross receipts (but not churches) will be filing the new Form 990-N, "Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ.

The IRS expects to mail the letters over a period of several months, finishing in December. See the attached sample letter available at the IRS website. If the IRS does not have a current mailing address, your non-profit may not receive a letter. However, the filing requirements must still be met to avoid losing your tax-exempt status.

The new form will be for tax periods beginning on or after January 1, 2007 and will be due by the 15th day of the 5th month after the close of each tax period, (ie., May 15 for a calendar year).

This annual form will must be filed electronically, there will be no paper form.

For more information, please go to www.irs.gov/eo, or email me directly.

Why is my external auditor asking me to sign a Management Representation Letter?

If you are a member of senior management and your financial statements are being audited, your external (independent) auditor will ask you to sign a management representation letter or “rep” letter before they release the audited reports to you.

So what is this “rep” letter? In format, it is a letter from management to the auditors but is typically written by the auditors.

Why is this necessary? In short, it is because it is required under Section 333 of U.S. Auditing Standards for audits of financial statements performed in accordance with generally accepted auditing standards.

During an audit, management makes many representations to the auditor, both oral and written, in response to specific inquiries from the auditors. As such, written representations from management should be obtained for all financial statements and periods covered by the auditor's report. Such representations from management are part of the audit evidence the independent auditor obtains, but they are not a substitute for the application of auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial statements under audit.

In many cases, the auditor applies auditing procedures specifically designed to obtain audit evidence concerning matters that also are the subject of written representations. For example, after the auditor performs procedures to identify related party transactions, the auditor may require written representation that all the related party transactions have been identified and disclosed.

In future postings, we will discuss who should sign the letter and the typical content of the letter.

Please feel free to contact us if you have other questions.

Under Statement on Auditing Standard #112, the auditors are required to communite certain information to those charged with governance. Who are these individuals? What are the auditors required to communicate? These and other issues will be explored as we determine who is responsible for financial information and who are responsible for guiding the mission of the church or ministry.

Those charged with governance are members of the board of directors, board of trustees, elders, etc. They are the individuals that oversee the senior pastor and help define, evaluate and refine the mission of the organization.

Responsibilities - the chain of command... Management of the church or ministry is responsible for the financial statements. Executive members of management report to the senior or executive pastor or director. The executive director reports to the board, or those charged with governance.

After the audit has been completed, the auditors are required to communicate certain information to those charged with governance. What items are included in the required communication? See my next post describing the information that must be communicated.

According to the Federal Reserve, debit card use has now surpassed credit card use. Unfortunately, debit card fraud has also grown, reaching $662 million in 2005, a 21% increase from the previous year.

Though debit cards are convenient to use, they put churches/ministries at greater financial risk for two reasons: (1) the cards directly access a church's bank account, so your money can be withdrawn by scam artists, and (2) debit cards don’t provide the same legal protection against fraud that comes with credit cards.

To help protect your Church when using a debit card, heed the following tips:

# - Periodically check the ATM or card-reader for signs of tampering (tape, loose connections, etc.). If you have assigned several ATM's to associate pastors, periodically review those cards for unusual tampering signs.

# -Remind your users to check for hidden cameras before entering your PIN, and shield your fingers on the keypad.

# - Check your bank and credit statements carefully.

If you suspect fraud, close the account immediately.
Remind your staff to not let the card be out of thier sight, especially at gas stations, restaurants, or convenience stores where the card’s data could be copied and used by scam artists.

Report errors, no matter how small, to the financial institution that issued the card.

In the last several fraud postings we have discussed ways that ministries and churches may be vulnerable for fraud. Fraud is defined as an intentional act to misrepresent financial information or misappropriate resources.

Management has a responsibility to set "ethical standards" within the organization. They must establish the "tone at the top" promoting ethical behavior. In post #4 we discussed that management has the opportunity to create a culture of honesty and high ethics.

By creating a positive workplace environment, poor employee moral can be reduced, thus affecting the employee's rationalization for committing fraud.

Hiring and Promoting Appropriate Employees - each employee has a unique set of values and personal code of ethics. When faced with sufficient pressure and a perceived opportunity, some employees will behave dishonestly rather than face the negative consequences of honest behavior. Hiring and promoting appropriate employees who promote ethical values may improve the workplace environment the decreasing the perceived opportunity to commit fraud.

In our final post in this fraud series, we will discuss employee discipline and evaluating controls to detect fraud.

·Discipline
The way an entity reacts to incidents of alleged or suspected fraud will send a strong deterrent message throughout the entity, helping to reduce the number of future occurrences. The following actions should be taken in response to an alleged incident of fraud:

• A thorough investigation of the incident should be conducted.

• Appropriate and consistent actions should be taken against violators.

• Relevant controls should be assessed and improved.

• Communication and training should occur to reinforce the entity's values, code of conduct, and expectations.

·Evaluating Antifraud Processes and Controls
Neither fraudulent financial reporting nor misappropriation of assets can occur without a perceived opportunity to commit and conceal the act. Organizations should be proactive in reducing fraud opportunities by (1) identifying and measuring fraud risks, (2) taking steps to mitigate identified risks, and (3) implementing and monitoring appropriate preventive and detective internal controls and other deterrent measures.

It must be stated if a group of people are working together to perform the fraud it makes it very hard to detect the act in a timely manner, but it will be exposed, for what is done in the dark will be exposed to the light.

If you have additional questions, please do not hesitate to contact us.

For January 2007

January 16 - Final 2006 individual estimated tax payment is due, unless 2006 tax return is filed and taxes are paid in full by January 31, 2007.

January 31- Employers must provide 2006 W-2 statements to employees.

January 31- Payors must provide 2006 Form 1099s to payees.

January 31 - Employers must generally file Form 941 for the fourth quarter of 2006 and pay any tax due.

January 31 - Employers must generally file 2006 federal unemployment tax returns and pay any tax due.

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.

Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

For more information on tax deadlines that apply to your business, contact us.

How can a church or ministry protect resources against fraud? One of the most important facets of fraud prevention is hiring and promoting appropriate employees. Each employee has a unique set of values and personal code of ethics. When faced with sufficient pressure and a perceived opportunity, some employees will behave dishonestly rather than face the negative consequences of honest behavior. However, the threshold at which dishonest behavior starts varies among individuals.

Proactive hiring and promotion procedures may include:

*Conducting background investigations on individuals being considered for employment or for promotion to a position of trust

*Thoroughly checking a candidate's education, employment history, and personal references

*Periodic training of all employees about the entity's values and code of conduct (training is addressed in the following section)

*Incorporating regular performance reviews and evaluations, how each individual has contributed to create an appropriate workplace environment in line with the entity's values and code of conduct

*Continuously evaluating an individual's compliance with the organization's values and code of conduct, and addressing violations immediately

Training

New employees should have formal training at the time of hiring about the entity's values and its code of conduct. This training should explicitly cover expectations of all employees regarding:

*Their duty to communicate certain matters

*A list of the types of matters, including actual or suspected fraud, communicated along with specific examples

*information on how to communicate those matters.

There should also be an affirmation from senior management regarding employee expectations and communication responsibilities. Such training should include an element of "fraud awareness," the tone of which should be positive but nonetheless stress that fraud can be costly (and detrimental in other ways) to the entity and its employees.

Confirmation

Management needs to clearly articulate that all employees will be held accountable to act within the entity's code of conduct. All employees within senior management and the finance function, we well as other employees in areas the might be exposed to unethical behavior (for example, procurement, sales and marketing) should be required to sign a code of conduct statement annually, at a minimum. Requiring periodic confirmation by employees of their responsibilities will not only reinforce the policy but may also deter individuals from committing fraud and other violations and might identify problems before they can become significant.

In post #7, we will discuss ways to discipline behavior and evaluate controls.

Understanding that management has a responsibility to prevent/detect fraud is hard for all types of entities, not just churches and ministries. One aspect of enhancing a value system within an organization is creating an office culture of honesty by creating a positive workplace environment.

Research indicates that wrongdoing occurs less frequently when employees have positive feelings about an entity than when they feel abused, threatened, or ignored. Without a positive workplace environment, there are more opportunities for poor employee morale, which can affect an employee's attitude about committing fraud against an entity. Factors that detract from a positive work environment and may increase the risk of fraud include:

*Top management that does not seem to care about or reward appropriate behavior

*Negative feedback and lack of recognition for job performance

*Perceived inequities in the organization

*Autocratic rather than participative management

*Low organizational loyalty or feelings of ownership

*Unreasonable budget expectations or other financial targets

*Fear of delivering "bad news" to supervisors and/or management

*Less-than-competitive compensation

*Poor training and promotion opportunities

*Lack of clear organizational responsibilities

*Poor communication practices or methods within the organization

The entity's human resources department often is instrumental in helping build a corporate culture and a positive work environment. Human resource professionals are responsible for implementing specific programs and initiatives consistent with management's strategies that can help to mitigate many of the detractors mentioned above.

Mitigating factors that help create a positive work environment and reduce the risk of fraud may include:

*Recognition and reward systems that are in tandem with goals and results

*Equal employment opportunities

*Team-oriented, collaborative decision-making policies

*Professionally administered compensation programs

*Professionally administered training programs and an organizational priority of career development.

Hiring and promoting appropriate employees goes a long way in detering fraud, see post #6 of this series on fraud.

The first step to prevent fraud is to ensure that controls are in place. These controls may be as simple as having background checks performed on people working with the financial department of the organization.

The following are some examples of preventative controls, but they are not all-inclusive.

* Creating a Culture of Honesty and High Ethics
It is the organization's responsibility to create a culture of honesty and high ethics and to communicate clearly acceptable behavior and expectations of each employee. Such a culture is rooted in a strong set of core values (or value system) that provides the foundation for employees to know how the organization conducts its business ethically.

*Setting the Tone at the Top
Board of Directors, officers, pastors and leaders of an organization set the "Tone at the Top" for ethical behavior within their organization. Research in moral development strongly suggests that honesty can best be reinforced when a proper example is set--sometimes referred to as the "Tone at the Top." The management of an entity cannot act one way and expect others in the entity to behave differently.

Management must show employees through its words and actions that dishonest and unethical behavior will not be tolerated, even if the result of the action benefits the entity. Moreover, it should be evident that all employees will be treated equally, regardless of their position.

For example, statements by management regarding the absolute need to meet operating and financial targets can create undue pressures that may lead employees to commit fraud to achieve them. Setting unachievable goals for employees can give them two unattractive choices: fail or cheat.

So how can management create a positive workplace environment? Tune in to Post#5.

This is a 3rd part posting of understanding fraud and the implications on the organization. In part 1, we discussed that churches, just like any organization, is susceptible to fraud. In an April 23, 2001 article by Christianity Today headlined "Jury Convicts Greater Ministries of Fraud," five leaders were convicted in Federal Court on 72 counts of conspiracy, wire and mail fraud, and money laundering, in one of the largest church fraud schemes in American history.

Is your organization's environment ripe for fraud?

First, if management or other employees have an incentive or are under pressure, this provides a reason to commit fraud.

Second, do circumstances exist -- for example, the absence of/or ineffective accounting controls, or the ability of management to override controls -- that provide an opportunity for a fraud to be perpetrated?