Supporting the activities and operations of churches and religiuos organizations is a serious financial challenge. The activities of these organizations, coupled with limited financial resources, result in a need for careful attention to financial management. With occasional media reports of financial irregularities in some religious organizations, there is an increasing call for financial accountability. Church members want to know, and have a right to know, how and where church funds are spent. In addition to accountability and financial reporting, there is a need for assistance in all aspects of financial management.

Accountants are experiencing increases in accounting and auditing activities as well as in requests for financial management assistance for all types of non-profit organizations. Futcher and Phillips (1986) addressed the need for using modern financial management techniques, specifically budgeting, in churches. Rowe and Giroux (1986) assessed the quality of financial disclosure at the diocesan level of the Catholic Church. Steele (1984) called for broader training of accountants and auditors so they can serve as business advisors. This call certainly applies to religious organizations as well. It is likely that accountants who have thus far only been involved in examining the books of account will soon have a much broader involvement in financial management of churches.

The purpose of this article is to explore the changing operating environment of all churches and religious organizations by focusing on an application to the Catholic Church. In doing so, the article reviews the organizational aspects and status of parishes, identifies the nature of financial guidance available, and describes the development of a financial management manual in a particular jurisdiction. Finally, the article suggests the implications for professionals in assisting parishes in financial management. While the application is based on parishes in the Catholic Church, the problems and solutions are generally independent of religious denomination and have broad application.

The Operating Environment

There are many churches that operate independently from any central governing authority; others however, are part of a larger organization under varying legal structures. The changing operating environment of churches requires persons involved in their financial management to have a better understanding of these relationships and the associated motivations and pressures if they are to serve effectively. These requirements apply to most religious denominations and nonprofit organizations even though organizational structures may be different.

The Catholic Church is organized in units called archdioceses and dioceses, each headed by an Archbishop or Bishop, respectively. A group of neighboring dioceses constitute a province, within which one diocese is designated the archdiocese, with the Bishop of that diocese (the Archbishop) having a special role in the province. For financial management purposes, however, each archdiocese and diocese is organizationally independent of every other one. To simplify terminology, we will refer only to a diocese herein.

Within each diocese, one of two different legal structures typically exists. The entire diocese can be organized as a single corporation, called "corporation sole," of which the Bishop typically is the president; individual churches are identified as parishes. From a business perspective, each parish could be considered a division in the corporation, but under the complete control of the Bishop. Other (non- parish) religious organizations such as universities, are generally independent of the diocese. An alternate legal structure of the diocese has each parish organized as a separate corporation, commonly known as "corporation aggregate." The Bishop is often the president of the board of directors (members) of each individual parish corporation, but ownership of the property lies exclusively with the individual parish.

Within these civil structures, Catholic Churches are also governed by church law called Canon Law. The various Canons make it clear that the diocesan Bishop is responsible for all the parishes in the diocese. Only the Bishop, after having consulted with a council of priests, can establish, suppress or alter parishes. It is the diocesan Bishop who entrusts priests with the care of particular parishes. In financial matters, Conons require that each diocese and parish have a finance council/committee. In addition, Canons specify that the Bishop may issue special instructions regarding administration. This requirements applies to such matters as accounting procedures, financial reporting, and other financial management procedures necessary to assure financial accountability.

Many parishes have the need for additional programs while experiencing reduced revenues, or at least revenues that are not increasing the same rate as the demands for programs. Within a given parish, this circumstance requires greater attention to financial management. To reduce costs, parishes are collaborating with each other and with other organizations on specific projects or programs. At the same time, certain parishes and religious organizations are seeking outside funding to support certain of their programs, particularly in human services. These changes suggest a need for strong accounting and financial management.

General Accounting and Financial

Management Guidance

In 1978 the AICPA issued its Statement of Position 78-10," Accounting Principles and Reporting Practices for Certain Non-profit Organizations." The purpose of this SOP was "to recommend financial accounting principles and reporting practices for nonprofit organizations not covered by existing guides that prepare financial statements in conformity with generally accepted accounting principles." Among the organizations named in this Statement are "religious organizations."

Because SOP 78-10 covers a wide range of nonbusiness organizations, it contains many provisions that do not apply to parishes and church- related organizations. Based on work by the Accounting Practices Committee of the United States Catholic Conference (USCC), the National Conference of Catholic Bishops (NCCB) and the USCC issued an updated "Accounting Principles and Reporting Practices for Churches and Church- Related Organizations" in 1983 (the NCCB/USCC Accounting Guide). This document includes the relevant portions of SOP 78-10, modifying and adapting them where necessary, to provide "guidance for Catholic Church organizations in classifying and recording financial activities relating to their mission and establishing norms for reporting these activities externally to actual or potential user groups."

While these guides are useful, at times they seem either too general or too technical, and individual parishes usually are not aware of their existence. In a diocese organized as corporation sole, accounting standards and other financial management practices usually have been established and mandated for all parishes. In other dioceses where individual parishes are separate corporations, any standardization and requirements for specified financial procedures are less likely to exist, or, at the very least, more difficult to impose. Individual diocesan parishes are often left to determine their own accounting and financial management procedures. This usually results from their existing on their own, and the lack of procedures provided by the diocese.

Local Background

This article addresses the situation in a midwestern archdiocese containing 286 separately incorporated parishes in a ten county area involving both rural and urban parishes and composed of many ethnic groups. Clergy and laity responsible for parish financial management have developed various approaches to accomplish their task. Many parishes have used a chart of accounts formulated in 1971 that was developed primarily for high schools, but directed to be used by all parishes. Some parishes have developed their own chart of accounts, and still others operate with very little structure. These same parishes have developed various budgeting systems, and have their own systems for reporting the financial condition of the parish. These systems are seldom the same for any two parishes.

The parishes in this archdiocese are also experiencing increases in requests for services that often exceed the ability of the parishes to provide. An increasing number of parishes are experiencing deficits in providing the programs. Clearly, parishes that continue to operate with deficits ultimately will encounter financial failure; this obvious problem further illustrates the need for better financial management.

Limited financial resources and the demand for increased programs have led many parishes to consider collaborating with other parishes and organizations. However, they have often found that because the methods of accumulating and reporting financial data were not comparable, they have been operating different levels of accountability. They often did not know the actual costs of particular programs, and found themselves "comparing apples and oranges."

Providing Parish Financial Management Guidance

In 1985, the Archbishop formed a committee to examine financial management practices in parishes and make recommendations for consistent financial accountability throughout the archdiocese. The main reasons for the committee were the concerns previously discussed: increasing deficits and difficulties in collaboration.

In the following years, the major product of the committee's work was the development of a Parish Financial Management Manual (Manual) for all parishes. The Manual, which is limited to financial management practices and procedures, provides guidance to parish administrators who manage the financial affairs of the parish. It addresses practices and procedures for parish accounting, budgeting, financial reporting, and periodic financial review, and is meant to serve a key role in establishing consistent parish financial accountability throughout the archdiocese.

Accounting and the Chart of Accounts

The heart of fiscal management in any organization is a good accounting system. This is particularly true in parishes where good stewardship and limited resources require an understanding of how assets are used and how various needs are met. To achieve consistent financial accountability, it was necessary to establish standards for accounting practices. The Manual provides definitions and general background on accounting principles and procedures. It discusses alternative accounting methods and provides guidance on accounting for contributed services, considering depreciation, and allocating costs/expenses to different programs and functions. The guidance is based on the principles in SOP 78-10 and the NCCB/USCC Accounting Guide.

The key to the accounting system is the establishment of a Parish Uniform Chart of Accounts (Chart). This Chart permits a parish to maintain either simplified or very detailed accounts depending on its needs. Whatever the level of detail, the use of the Chart results in all parishes using the same account numbers when accounting for the same type of transaction, thus ensuring consistency.

The Chart makes use of a six-digit code number of the form XX-XXXX. The first two digits identify the program or function, and the last four identify a particular asset, liability, revenue, or expense. This was a major departure from the previous chart where, for example, one four- digit number identified administrative salaries, another identified instructional salaries, a third identified operational/maintenance salaries, and a fourth identified activity salaries. Under the new numbering system, one four digit number identifies salaries and the appropriate program is identified by the two digit prefix. The major categories of programs and functions in the Chart along with the general accounts for assets, liabilities, revenues, and expenses are summarized in Figure 1. The full Chart of Accounts is an expanded version of one developed with the assistance of an independent CPA, and contains 37 separate program codes, and 155 separate assets/liabilities/revenues/expenses account codes.

Budgeting and Financial Reporting

A survey of the parishes revealed a great diversity of budgeting and financial reporting systems, ranging from exotic and detailed systems to minimal efforts better described as non-systems. Clearly, the parishes have different needs depending on the scope and complexity of operations. General budgeting guidance was developed in the Manual that, like the Chart, could be used at the level of detail appropriate for a given parish. In all cases, the principles of reconciling past budgets with past expenditures, and projecting future expenses on the basis of anticipated operations rather than percentage adjustments to past budgets were included. In addition, the Manual recommends that anticipated revenues and expenses be estimated on a monthly or quarterly basis to permit planned timing of expenditures to minimize cash flow problems. To implement this guidance, model budget forms were developed. The structure for the forms was dictated by the revenue and expense codes in the Chart.

Financial reporting is the key element in communicating the financial condition of the parish to its members and contributors. While a financial report should be comprehensive so that it reflects the financial aspects of the parish operations, it also has to be tailored to the information needs of the user. Therefore, several different types of financial reports were developed as models to meet these different needs.

Very simple periodic reports (e.g., weekly, monthly) can keep members of a parish advised of its financial situation. Detailed monthly or quarterly financial reports are required for those responsible for parish financial management. Finally, a comprehensive annual financial report is required for management to evaluate financial performance in comparison with the budget. It provides a critical element in developing future budgets. Summaries of the annual report are submitted to the archdiocese and should be distributed to parish members.

Model forms for all of these reports were developed for individual parishes. Because of the increased focus on programs and functions in managing parish operations, variants of the statement of activity and balance sheet suggested by Arndt and McCabe (1986) were used in addition to the traditional structures. As with the budget forms, the financial report forms follow directly from the codes used in the Chart.

Fund and Financial Management Guidelines

Most parishes operate like small businesses rather than large corporations. They experience the same managerial dominance, internal control deficiencies, and policy-making body deficiencies identified by Raiborn (1982) as common problems in small businesses. Even in parishes that have an extensive lay (non-clergy) involvement in financial management, as many do today, the same problems exist. The area that is usually weakest is internal control. Therefore, the Manual contains significant detail on procedures to institutionalize good internal controls.

One area of great concern involves the handling of offertory collections. Specific concerns include the actual collection of money, the accounting and recording functions, and, ultimately, the depositing of the proceeds in a bank. The role of evidential matter is strongly emphasized herein and in the area of documentation of disbursements. Another area of concern in parishes is the "affiliated" organizations (e.g., parish societies, athletic associations) that need the affiliation with the parish, but want to maintain financial independence. The consequence is often a proliferation of checking and savings accounts with no real accountability to the parish. Specific guidelines for insisting on financial accountability from affiliated organizations are included in the Manual along with guidance for exercising control over money.

Other topics of importance for which guidance is provided include all fund-raising activities, petty cash funds, payroll and compensation, investments, valuing fixed assets, restricted funds, unrelated business income, and any federal and state filing requirements.

Periodic Financial Review Procedures

In addition to an annual audit of financial statements, a periodic audit of the financial management practices of an organization is important in minimizing financial irregularities; this applies to parish operations as well. Unlike a business, which may have a coherent group of persons performing financial functions, parishes often have dedicated, well-intentioned volunteers performing similar financial functions. The small number of persons so involved does not allow for proper separation of duties. Paid staff and volunteers are subject to human error. They may make honest mistakes, or they may be inclined to misuse or misappropriate parish property.

Auditing procedures are required to minimize and detect such events; the Manual refers to these audits as financial reviews. The guidance in the Manual is intended to encourage ongoing management review of the parish financial affairs, ranging from internal reviews by parish staff and parish members to external reviews by archdiocesan staff or independent auditors. A key element in conducting a periodic financial review is the structure for identifying correct procedures and irregularities. The Manual incorporates an Internal Control Questionnaire modeled after one developed in the Diocese of Portland, ME. A significant feature of the questionnaire is that each item therein is identified by reference to the section in the Manual which discusses the issue. The questionnaire, then, can serve as a check-off list to monitor and improve a parish's financial management practices.

Parish Use of Computer Resources

Approximately 30% of the parishes in the archdiocese use computer assistance (mostly microcomputers) in their financial management. It was found that there were at least 34 different models of microcomputers in use. Many parishes have little knowledge to determine whether using computer resources could be beneficial. To address these concerns, the Manual provides some general guidance in the use of computers. It includes evaluations of several alternative software systems for parish use that had been reviewed by an archdiocesan committee, as well as information regarding computer hardware.

Archdiocesan Policies

In a diocese organized as a single corporation, financial management procedures similar to those previously described could be mandated for all parishes both under civil and Canon Law. In a diocese where the parishes are separate corporations, however, it is unlikely that such requirements would be made, although fully justified under Canon Law. In the present case, several policies have been mandated that will promote consistent financial accountability throughout the archdiocese as well as help assure financial viability of local parishes. Other procedures exist as "guidelines" for individual parishes.

All parishes have been directed to use the Chart, but each parish retains the decision about the level of detail at which the account will be maintained (i.e., how refined the revenue and expense records are). Each parish must submit an annual summary of its financial report for the archdiocesan review. This report includes key information for identifying financial soundness.

Because of an increasing number of parishes developing deficits, any parish that proposes a deficit budget or that has operated at a deficit for two years must submit the proposed budget for the Archbishop's approval. In addition to the budget, the parish must also submit a plan for eliminating the deficit.

A policy that will help achieve consistent financial accountability is requiring periodic financial reviews of individual parishes by persons from the archdiocesan staff or by independent auditors. This review is based on the Internal Control Questionnaire and includes a site visit.

Implications for Operational and Financial Auditors

Many parishes are presently supported by professional accountants and bookkeepers, some as paid employees, others as volunteers. It is likely that their number will increase. With every disclosure of a financial irregularity in any church-related organization, there will be increasing pressure for auditing. Because the number of clergy is decreasing, financial management functions are being spread out and there is less control by clergy. Thus, there will also be increasing pressure from parishes for auditing. To perform a credible and meaningful audit, the auditor must know the operating environment of the organization. It should be clear that the mission/goals/objectives of a parish are significantly different from those of a business. In addition, there must be an understanding of the organizational context in which a parish must operate. Finally, the existing financial management procedures and practices must be evaluated.

It is anticipated that the development of formal guidance/direction, such as that in the Manual, will enhance the ability of individual parishes to improve their financial management practices. Such an approach greatly simplifies the tasks of the staff and volunteers in administering the parish finances. It will also facilitate the work of accountants, auditors, and other professionals in assisting religious organizations.