By Jim Canning
In recent years the issue of corporate financial accountability has become increasingly important, even for churches. As a result, more and more churches are providing annual financial reports to their congregations. Unfortunately, many of these reports are simply based on business financial reporting models and therefore may not convey the church’s finances as clearly as they could.
In addition, it is not uncommon for such statements to contain technical errors which, while not readily apparent to most readers, can detract from the reader’s ability to fully understand what the report is intended to communicate.
Church income
As an example, I recently visited a large denominational church in a well known city. In the church’s bulletin it showed the income and expenditures for the year and indicated the difference, a negative number, as the “loss” for the year. This seemed to imply that the church measures its success in terms of how much money came in, not by the spiritual growth of its members or its outreach in the community.
From a technical standpoint, the terms “profit and loss” are not normally used in church accounting except for certain activities such as a church bookstore where profit or loss might be appropriate. I have subsequently seen the same reporting error in a number of other church financial statements.
Shortly thereafter I saw another church report that referred to the difference between income and expenses as the net total; another technical and confusing error. When showing the difference between income and expenses for a church, the correct term is excess of income over expenditures and not a total.
‘Income over (under) expenditures’
In the case of a deficit, a preferable term is “income over (under) expenditures” with the deficit shown in brackets. Note, either the term expenses or expenditures may be used, however I prefer the term expenditures since monies sent to missionaries and certain other cash outflows are not really an expense of running the church, but part of the church’s ministry outreach.
Another weakness in some financial reports is that while the numbers may be correct and presented in accordance with generally accepted accounting principles (GAAP), there may be an important issue or trend that is not readily apparent, especially to those not familiar with accounting concepts.
The balance sheet of one large church showed that the church had total assets of $9.8 million and net assets (assets minus liabilities) of $9 million. At first glance it appeared that the church had plenty of assets and certainly did not need my money. Upon closer examination however, I noted that the church’s net investment in property and buildings (cost less depreciation) was approximately $9.4 million. Since the church’s assets included $460,000 of restricted funds, the church was actually in a slight deficit position in terms of it’s ability to meet current obligations; a much different picture.
In this case, breaking out the net assets into the portion represented by property and equipment and the amount represented by other items would have made this situation clearer.
Common weaknesses
While not technically errors, there are other common weaknesses in church financial statements I have noticed.
Not indicating the period being reported on. The “operating statement” or “statement of income and expenditures” should clearly indicate the period being reported on. One operating statement showed the date of Dec. 31, but did not indicate when the period started. I could not tell whether the statement covered the period of just one month, a whole year, or some period in-between. The heading to this statement should include a line indicating the period being reported upon (i.e. January 1 to March 31 200X).
Using too many dollar ($) signs. In some instances financial statements will show the dollar sign before every number. Usually this is not intentional, but simply the way the computer prints out the numbers. All the extra dollar signs are not necessary, and only serve to make the numbers harder to read. Generally, dollar signs should only be used at the top and bottom of a column of numbers, not in-between.
Not rounding off to whole numbers. When preparing financial statements, it is generally best to round off numbers to the nearest whole dollar rather than reporting to the exact penny. Whole numbers are much easier to read and understand, and a few pennies either way will have no material effect upon what the statements are showing Showing information for just the current period. Often, financial statements show information for just one period of time such as the current month or the latest fiscal year. While this may be fine in some cases, it is usually helpful to show comparative data such as the prior year’s numbers for the same period. This enables the reader to compare current year’s performance with the prior year, and to see what changes have occurred during the period.
Presenting the financial statements without accompanying comments. In many cases, financial statements are given out without any cover memo or other explanation; simply leaving it up to the reader to figure them out. For accountants and others who are familiar with financial reporting this may be okay. For most people, however, a brief cover letter or accompanying memo pointing out key highlights of the report will be very helpful.
Is income increasing or decreasing and why? Are there positive or negative trends reflected in the numbers that might not be readily apparent to the reader that they should be aware of? What special things happened during the year that the church, as a congregation, should celebrate and give thanks to God for? Remember, financial statements simply show where money came from and how it was used. It does not indicate what has been accomplished with the funds.
This can be effectively done by adding comments, charts or tables to the financial statements indicating such things as attendance, growth in membership, baptisms and missionary giving. One effective way of doing this is by making the financial statements part of a larger annual report on the church’s activities for the year rather than giving them out separately.
In today’s environment, providing financial reports can be an important part of a church’s accountability to its members. In doing so care should be taken to ensure that such reports communicate effectively not only the church’s finances, but what the church is accomplishing as well.
Before issuing your next financial report, take a moment to think about how it will look to the average church member. Is it readily understandable? Are there graphs, charts, or other things that make it easy to read? And lastly, does it effectively communicate what the church is actually accomplishing through the money it receives?
Jim Canning CPA lives in Spokane, WA, and is retired from positions at World Vision and Biola University.
