Your Church magazine asked its Editorial Advisors and Contributing Editors how pastors, business administrators, and executive pastors can lead well amid the changing realities in 2010–and here’s what they said.
Guard against the growing risk of embezzlement
One major church insurer logged 32 embezzlement-related claims in 2009, up 12.5 percent from its recent annual averages. “Regrettably, financial misconduct tends to be more predominant in economic downtimes,” says David Middlebrook, another Texas-based attorney specializing in church law.
Fraud experts often refer to a three-legged stool for embezzlement risk: opportunity, need, and organizational ethos. Opportunity often is born out of non-existent or poorly managed financial controls. A variety of new resources help churches set proper controls, including The Essential Guide to Church Finances (2009, Christianity Today International–the parent ministry of Your Church), and Weeds in the Garden (2009, NACBA Press), as well as guidance from organizations like the Evangelical Council for Financial Accountability (http://www.ecfa.org/PDF/BestPractices-Churches.pdf).
In terms of need, church leaders must pay attention to hardships in the lives of their employees. The most common scenario for church fraud involves longtime employees who face an unexpected financial stress–a job loss for a spouse or an extended illness with hefty medical bills for a family member. Some studies suggest the average tenure of a church employee who commits fraud is seven years, Sommerville says, and recent headlines reflect that. “These employees don’t start off thinking they’re going to steal,” he says. “They think they’re going to borrow from you and pay you back when things improve.”
A strong organizational ethos that encourages transparency and requires high standards also helps prevent financial misconduct. “It really is helpful if churches create this above-reproach, ethical standard, something they continually talk about and include in their code of ethics–’We’re going to operate above reproach in every area of ministry from the senior pastor and board on down,’ ” Sommerville says. “If that’s the atmosphere, fellow employees may catch and report them.”
Re-think investment strategies
For decades, Wall Street touted the stock market’s ability to deliver annual average returns of 10 percent for those who invested the majority of their assets in equities. Even in years when the stock market ebbed rather than flowed, the thinking went, most losses would be regained–and then some–in future years. Tempted, many churches participated, abandoning more conservative approaches that delivered modest earnings but protected principal, says Mike Batts, founder and managing shareholder of a Florida-based CPA firm serving nonprofits.
But the stock market’s topsy-turvy past three years has made it “obvious you can lose substantial principal,” Batts says. That’s a problem, especially when investment earnings fund specific ministry initiatives. During the past 18 months, endowments on average have lost 30 percent of their value, Batts says, shrinking revenue for ministries and creating relational and publicity challenges for churches with donors.
Batts says church leaders should consider returning to less risky investment strategies, such as certificates of deposit and treasury securities held to maturity. While these investments may average only two percent or three percent returns in the current market, the principal remains protected. Before doing so, though, Batts says church leaders need to realize that in some investments, values aren’t fully realized until a maturity date, meaning an early cash-out to address a cash crunch can result in lower-than-expected returns. “You must plan your liquidity so that you don’t need that money,” he says.
Middlebrook says another common pitfall for churches is investment schemes. Richard Hammar, Your Church’s senior editorial advisor and the senior editor of Church Law & Tax Report and Church Finance Today, recommends the following steps to avoid financial scams:
- Use an investment committee to make recommendations regarding the investment of funds;
- Create an investment policy that prohibits investments in specified instruments or programs;
- Avoid speculative or risky investments. If a proposal sounds too good to be true, it probably is;
- Avoid investing in companies or programs in which a board member has a personal interest. Such investments are not always inappropriate. But they demand a higher degree of scrutiny.
Read this article in its entirety at YourChurch.net.
