Manual of Business Methods in Church Affairs In accordance with Title I, Canon 7, “Of Business Methods in Church Affairs”, and Resolution D-147 (1979 GC): “Accounting Principles and Practices for Dioceses, Parishes, and Other Congregations” (Updated periodically as indicated at the end of each Chapter) _______________________________________________________________________________ The Domestic and Foreign Missionary Society of the Protestant Episcopal Church in the USA © COPYRIGHT 2007, 2009, 2012 The Domestic and Foreign Missionary Society of the Protestant Episcopal Church in the USA All rights reserved. This manual may not be reproduced in any format without the written consent of the Domestic and Foreign Missionary Society of the Protestant Episcopal Church in the USA. Office of the Treasurer, 815 Second Ave., New York, N.Y. 10017 (212) 716-6075 The General Convention of The Episcopal Church To the members of the Episcopal Church: The Canons of the Episcopal Church set forth the general responsibility and accountability for the stewardship of the Church’s money and property. Title I, Canon 7 (pages i2 – i3 in this Manual) specifically addresses the business methods prescribed for every diocese, parish, mission, and institution subject to the authority of the Episcopal Church. This Manual identifies requirements and seeks to provide helpful advice on sound, practical internal controls, accounting guidelines and business practices. We believe that it can be a tool that will support your efforts to perform the duties and responsibilities of your office. Sections of the Manual are updated regularly. The date of the latest update appears at the final page of each chapter. As always, we welcome your comments, which help us with any future updates. Thank you for the opportunity to serve you and our Church. Faithfully, N. Kurt Barnes, Treasurer 815 Second Avenue • New York, N.Y. 10017 • (212) 922-5296 • Fax (212) 876-0395 • (800) 334-7626 ACKNOWLEDGEMENTS Contributors to the revision of this are listed below. This work could not possibly have been completed without their professional gifts and commitment to the ministries of the Church. We acknowledge them and thank them for their work. VOLUNTEER CONTRIBUTORS EPISCOPAL CHURCH CONTRIBUTORS David Booth Beers Mr. N. Kurt Barnes Chancellor to the Presiding Bishop Treasurer Mr. Scott Konrad Mr. Alpha Conteh Diocese of Connecticut Controller Mark J. Duffy Canonical Archivist Dr. C. Kirk Hadaway Director of Research DFMS FINANCE OFFICE CONTACTS Mr. Alpha Conteh Controller Mrs. June Victor Assistant to the Treasurer Ms. Sheila Golden Administrative Assistant to the Treasurer MANUAL OF BUSINESS METHODS IN CHURCH AFFAIRS TABLE OF CONTENTS Introduction: General Information The format and design of this manual should assist you in fulfilling the responsibilities for the financial oversight of a diocese or congregation. The accounting principles and practices described in this manual should be understandable to most readers. The concepts and terminology have been kept simple yet consistent with the demands of professional accounting principles. Chapter I: Financial Management Budgeting is the allocation of the church‘s resources, in accordance with a plan, for the achievement of its objectives and goals. The church budget is one of the most effective tools available for the proper stewardship of the church’s assets. Chapter II: Internal Controls What type of bookkeeping system should we use? How many bank accounts do we need? Who should be able to sign checks? Who should deposit the weekly receipts in the bank, and how? These are just some of the questions to be answered when setting up an accounting system for a congregation. Such questions should be periodically reviewed. Chapter III: Bookkeeping The accounting year for all Episcopal congregations and dioceses is January 1 through December 31, according to the Canons of the Episcopal Church, Title I, Canon 7, Section 1(i), which are included in the Introduction of this manual. Chapter IV: Taxes and the Episcopal Church Timely and accurate compliance with all applicable Federal and State tax laws is an essential element of sound management of church finances. Federal and State governments have placed increased pressure on all governmental units to increase revenues through intensified application of existing tax laws to all types of organizations, including churches. Chapter V: Clergy Discretionary Funds The Episcopal Church has developed these guidelines for the benefit of clergy, dioceses, congregations, institutions, and others with authority over funds of the Church. The purpose of these guidelines is to provide information and guidance in the structure and use of a class of temporarily restricted or designated funds generally known as clergy discretionary funds. Chapter VI: Audit Guidelines for Congregations These audit guidelines were developed to assist auditors in performing the annual audit of the books of account of the congregations of the Episcopal Church. Annual audits are required by the Canons of the Episcopal Church for all parishes, missions, and other institutions. The primary purpose of an audit is to assure that financial statements are fairly stated. Any person handling the monies or investments of the church needs an audit to protect the church assets and him/her against suspicion of mishandling those assets. Similarly, rectors, vestries, vicars, bishop‘s committees, treasurers and other persons in positions of responsibility may be liable for any losses which would have been discovered by an ordinary audit but were not discovered because they failed to have an audit conducted. Chapter VII: Insurance Responsible stewardship demands protection of the Church’s people and property from certain risks. Title I, Canon 7 (6), states – “All buildings and their contents shall be kept adequately insured”, and Title I, Canon 7 (3), states – “Treasurers and custodians, other than banking institutions, shall be adequately bonded; except treasurers of funds that do not exceed $500 at any one time during the fiscal year.” Table of Contents • 2 Chapter VIII: Parochial Reports Since the first General Convention of the Episcopal Church, congregations have provided a report of membership, baptisms, communicants, services and finances. In 1804 the Committee on the State of the Church was established to review this information and prepare a summary report to General Convention. The authority for the Parochial Report is described in the Constitution and Canons of the Episcopal Church, Canons I.6, I.7, and I.17. The text of these canons is included as an appendix to these instructions. Chapter IX: Records Management This chapter offers guidelines on practical issues that treasurers and administrators of congregations will encounter with business records. The chapter includes a general retention schedule that can be modified and adopted for a congregation‘s use. Appendix Appendix A: Forms This appendix lists many forms commonly used by treasurers of congregations, and provides instructions for obtaining copies of them. Samples of some generic forms appear on the pages immediately following this Appendix. Appendix B: Glossary INTRODUCTION: GENERAL INFORMATION CHAPTER CONTENTS Introduction...................................................................................................................................i-1 Section A. Constitution and Canons for the Government of the Protestant Episcopal Church in the USA: Title I, Canon 7: “Of Business Methods in Church Affairs”….......................i-2 Section B. Uniform Business Methods and Accounting Principles..............................................i-4 Section C. Introduction to Fund Accounting ................................................................................i-6 Section D. Calendar of Important Due Dates................................................................................i-7 Introduction This Manual identifies requirements and seeks to provide helpful advice on sound, practical internal controls, accounting guidelines and business practices. We believe that it can be a tool that will support your efforts to perform the duties and responsibilities of your office. The format and design of this Manual should assist you in fulfilling the responsibilities for the financial oversight of a diocese or congregation. The accounting principles and practices described in this Manual should be understandable to most readers. The concepts and terminology have been kept simple yet consistent with the demands of professional accounting principles. Practical internal controls are the cornerstone of the best financial management. Management of financial resources is an important element of stewardship. The Church has entrusted us with the funds placed in its hands for mission and ministry. We honor this trust by caring for detail and acting accountably. Treasurers at all levels in the Church are custodians of this trust. This Manual is a guide that will assists in preserving the trust. This Manual has been designed for the use of dioceses and congregational elements of the Episcopal Church. The guidance in this Manual may not be appropriate for use by other church controlled or related institutions, such as hospitals, colleges, universities, and health and welfare organizations. The general responsibility and accountability for the stewardship of the Church‘s money and property is delineated in the Canons of the Episcopal Church. Title I, Canon 7, specifically addresses the business methods prescribed for every diocese, parish, mission, and institution subject to the authority of the Episcopal Church. This Canon (as of July 2009) is produced in its entirety on the following pages. Introduction: General Information • i-2 Section A. Constitution and Canons for the Government of the Protestant Episcopal Church in the USA: Title I, Canon 7: — Of Business Methods in Church Affairs CANON 7: Of Business Methods in Church Affairs Section 1. In every Province, Diocese, Parish, Mission and Institution connected with this Church, the following standard business methods shall be observed: (a) All accounts of Provinces shall be audited annually by an independent certified public accountant, or independent licensed accountant or such audit committee as shall be authorized by the Provincial Council. The Audit Report shall be filed with the Provincial Council not later than September 1 of each year, covering the preceding calendar year. (b) Funds held in trust, endowment and other permanent funds, and securities represented by physical evidence of ownership or indebtedness, shall be deposited with a National or State Bank, or a Diocesan Corporation, or with some other agency approved in writing by the Finance Committee or the Department of Finance of the Diocese, under a deed of trust, agency or other depository agreement providing for at least two signatures on any order of withdrawal of such funds or securities. But this paragraph shall not apply to funds and securities refused by the depositories named as being too small for acceptance. Such small funds and securities shall be under the care of the persons or corporations properly responsible for them. This paragraph shall not be deemed to prohibit investments in securities issued in book entry form or other manner that dispenses with the delivery of a certificate evidencing the ownership of the securities or the indebtedness of the issuer. (c) Records shall be made and kept of all trust and permanent funds showing at least the following: (1) Source and date. (2) Terms governing the use of principal and income. (3) To whom and how often reports of condition are to be made. (4) How the funds are invested. (d) Treasurers and custodians, other than banking institutions, shall be adequately bonded; except treasurers of funds that do not exceed five hundred dollars at any one time during the fiscal year. (e) Books of account shall be so kept as to provide the basis for satisfactory accounting. (f) All accounts of the Diocese shall be audited annually by an independent Certified Public Accountant. All accounts of Parishes, Missions or other institutions shall be audited annually by an independent Certified Public Accountant, or independent Licensed Public Accountant or such audit committee as shall be authorized by the Finance Committee, Department of Finance, or other appropriate diocesan authority. Introduction: General Information • i-3 (g) All reports of such audits, including any memorandum issued by the auditors or audit committee regarding internal controls or other accounting matters, together with a summary of action taken or proposed to be taken to correct deficiencies or implement recommendations contained in any such memorandum, shall be filed with the Bishop or Ecclesiastical Authority not later than 30 days following the date of such report, and in no event, not later than September 1 of each year, covering the financial reports of the previous calendar year. (h) All buildings and their contents shall be kept adequately insured. (i) The Finance Committee or Department of Finance of the Diocese may require copies of any or all accounts described in this Section to be filed with it and shall report annually to the Convention of the Diocese upon its administration of this Canon. (j) The fiscal year shall begin January 1. Section 2. The several Dioceses shall give effect to the foregoing standard business methods by the enactment of Canons appropriate thereto, which Canons shall invariably provide for a Finance Committee, a Department of Finance of the Diocese, or other appropriate diocesan body with such authority. Section 3. No Vestry, Trustee, or other Body, authorized by Civil or Canon law to hold, manage, or administer real property for any Parish, Mission, Congregation, or Institution, shall encumber or alienate the same or any part thereof without the written consent of the Bishop and Standing Committee of the Diocese of which the Parish, Mission, Congregation, or Institution is a part, except under such regulations as may be prescribed by Canon of the Diocese. Section 4. All real and personal property held by or for the benefit of any Parish, Mission or Congregation is held in trust for this Church and the Diocese thereof in which such Parish, Mission or Congregation is located. The existence of this trust, however, shall in no way limit the power and authority of the Parish, Mission or Congregation otherwise existing over such property so long as the particular Parish, Mission or Congregation remains a part of, and subject to, this Church and its Constitution and Canons. Section 5. The several Dioceses may, at their election, further confirm the trust declared under the foregoing Section 4 by appropriate action, but no such action shall be necessary for the existence and validity of the trust. Section B. Uniform Business Methods and Accounting Principles For many years there were no separate, formal or uniform accounting principles for any type of not-for-profit organization (NFPO), including churches. In June 1993 the Financial Accounting Standards Board (FASB) issued two comprehensive statements, Numbers 116 and 117, which established the basis for generally accepted accounting principles for not-for-profit organizations. The two statements issued by the FASB amended or superseded many of the Statements, Opinions, Statements of Position and Interpretations previously issued. Not-for-profit Introduction: General Information • i-4 organizations should follow the guidance in the effective provisions of FASB Statements and Interpretations unless the specific pronouncement explicitly exempts not-for-profit organizations or the subject matter precludes such applicability. Subsequent pronouncements issued by the FASB apply to not-for-profit organizations unless those pronouncements explicitly exempt not- for-profit organizations or the subject matter precludes their applicability. Compliance with these FASB statements is required in order to be in accordance with Generally Accepted Accounting Principles (GAAP). Most financial institutions and other users of financial statements, including government and private granting sources, require that church financial statements be presented in accordance with GAAP. Please be aware that when financial statements are not in accordance with GAAP, auditors must note those exceptions in their auditor’s opinion. Method of Accounting. The use of the accrual method of accounting is required by GAAP and is the preferred method. Many congregations, however, continue to use the Cash Basis method of accounting, in which receipts are recorded when received and expenses are recognized when they are paid. Although this method is not in accordance with GAAP, it is considered an “Other Comprehensive Basis of Accounting” (OCBOA) and is an acceptable method for use by congregations. The Cash Basis may be modified to accrue some, but not all, activities or to record depreciation. Dioceses should use the accrual method of accounting. Financial Statements In general, GAAP requires not-for-profit organizations to issue a statement of financial position, a statement of activities, and a statement of cash flows. Statement of Financial Position (SFP) – is the primary financial statement that provides information about an organization’s assets, liabilities and net assets and about their relationship to each other at a particular point in time. This statement, which is frequently referred to as the Balance Sheet or Statement of Assets and Liabilities, assists donors, creditors, members of the organization itself, and others to determine the organization’s ability to continue to provide services. The SFP also allows for the assessment of the organization’s liquidity, solvency, and financial flexibility needed to obtain external financing and satisfy its day-to-day debts. The SFP should classify accounts as current or non-current; by sequencing assets according to their nearness to conversion to cash; and liabilities according to their maturity and resulting use of cash. The SFP should present three classes of net assets: permanently restricted; temporarily restricted; and unrestricted. Each of these classifications is discussed below:  Permanently restricted net assets are that part of an NFPO’s net assets that results from: — Contributions and other inflows of assets whose use by the organization is limited by donor-imposed restrictions that do not expire or cannot be satisfied by actions taken by the organization; — Other asset increases and reductions that are so restricted; or