Financial ABCs Best Practices for Audits Budgets Compensation

Financial ABCs: Best Practices for Audits, Budgets, Compensation and Beyond Saturday, February 3, 2018 Bill Brownson, CFO & Director of Administration 614. 844. 6200 Powell UMC

Key Themes § What questions and information would you like covered? § Open dialogue of what works and what doesn’t § Financial Administration is a mission of the church § Budget basics § Confidence in process and controls keeps the focus on the mission § Information Resources § Always and Never 2

Resources § GCFA: http: //www. gcfa. org/ § West Ohio Conference: http: //www. westohioumc. org/ § The Book of Discipline of the United Methodist Church, 2016 § West Ohio Conference Annual Journal and Record (available online) § Conference Center Staff, 1 -800 -437 -0028 • • • 3 Apportionment and Statistical Questions: Jack Frost Workers Compensation: Joy Perry Pension Benefits and Board of Pension & Health Benefits: Mike Kremnitzer Health Insurance: Sandi George Local Church Audit and Tax Questions: Jeri Seabaugh Budgets, Policies, CFA, Trustees: Bill Brownson

Administration & Stewardship Church Mission • Resource Alignment Reporting & Control • Accounting systems • Internal controls • Reports with helpful information The Church in Action • Plans & programs • Locally • West Ohio Conference • Globally Good Governance • Finance Committee • Administrative Council • Investment Committee • Charge/Church Conferences 4

A Common Budget Development Timeline 5 Summer September • Annual Campaign planning • Confirm theme • Identify leadership • Set the timeline • Prepare materials • Continue annual campaign planning • SPRC evaluates staff and recommends compensations for next year • Analyze YTD results against current year budget • Set assumptions for next year’s budget October/ November • Annual campaign concludes and results are communicated • First and second pass of budget is presented to Finance Committee • Finance Committee passes motion recommending the annual budget • Conference provides insurance, pension and apportionment December • Finance Committee presents budget to Administrative Council • Administrative Council approves budget • The budget is shared with the congregation along with missional priorities and any adjustments from prior years

Responsibility for Sources and Uses • How much revenue comes from each source? • What other sources of income do you have? • How much in staff compensation is too much? • What other sources of expenses do you have? Should you budget a surplus? 6 Sources Uses Pledges Staff Compensation Non-pledge Building Operations Cash Ministry & Mission Other income Other Expense

Compensation can be 60% of Budget Jan Feb Mar April-Dec Total Pastor Comp Salary 4, 000 36, 000 48, 000 Housing Allowance (if applicable) 1, 500 13, 500 18, 000 250 250 2, 250 3, 000 1, 964 17, 676 23, 568 949. 50 8, 545. 50 11, 394 2, 500 22, 500 30, 000 723 723 6, 507 8, 676 Varies Varies $11, 886 $106, 979 $142, 638 Accountable Reimbursement Health Insurance (Family 2) Pension/CPP (17% of compensation) Lay Employee (FT example) Salary Health Insurance (single example) Pension-consistently applied (UMPIP) 7 Payroll Taxes: Social Security, Medicare, City [State and Federal income taxes & School District tax do not need budget; FUTA & SUI considerations] Per tax tables and W-4 Totals $11, 886 Source Documents: Charge Conference Compensation Forms

Other Compensation Considerations § Parsonages are equal to an additional 25% of cash salary (for pension purposes) § Cash salary : • Does not include accountable reimbursement • It does include other cash allowances classified as taxable income payable to the pastor (e. g. , tuition, insurance premium on a spousal plan) § Supplemental clergy life insurance of $50, 000 costs $174/year and is taxable; total insurance is then $100, 000; $50, 000 of which is a taxable benefit § Maximum pre-tax contributions to the UMPIP (a 403(b) plan) is $18, 000 in 2017 if not yet 50; $24, 000 for 50 and over § Clergy and lay employees may contribute toward health insurance on a pretax basis if the church has adopted a Section 125 Flexible Spending Plan 8

Tax-Related Issues § Employees – including all pastors – receive W-2’s § Withholding for Clergy: Never Social Security or Medicare; always municipal taxes; State and Federal income taxes may be withheld § Non-employee workers receive 1099’s • Request W-9 when work commences, prior to payment • To the extent payments exceed $600 annually • Beware of Workers Compensation § Housing allowance and housing exclusions • Approved by DS at charge conference or time of appointment • Must be kept on file § Charitable giving records; gift acknowledgement requirements 9

More Expenses to Budget § Operations & Administration • • Gas Electric • Technology hardware and software Water • Reserves Telephone/internet • Planned projects Insurance Supplies Routine maintenance, buildings and grounds • Service contracts (e. g. , copiers) • Workers’ compensation 10 § Other Expenses

Ministry and Mission Budget § Ministry Examples • Sheet music • Sunday school materials • Nursery supplies • Bible study materials • Training • Consultants/coaches *pass throughs 11 § Mission Examples • • Community outreach Partnerships VIM/global missions Food pantries Fundraiser expenses Special Sundays* Advance specials*

Connectional Giving* § What is it? • Obligations of local churches • Paid to the district, conference and general church • For our connected mission and the administration of that mission • Between 15% & 20% of a church’s operating budget • 10% to 15% of total revenue • About $211/attendee/year • Part of operating or mission and ministry budget? 12 * Also known as apportionments § What does it make possible? • Clergy retirement health insurance and care for disabled clergy • New churches and revitalized churches • Mission work around the world • Clergy education and development • Camps • How is it calculated? • 1/3 church membership • 2/3 church operating expenses

Best Practices for Budgeting § Know your historical trends • Ratios of salary and related to total expenses • Proportion of revenue from pledge, non-pledge and cash • Total amount from other sources § Keep your fund accounting clean! § Review contracts and continuing expenses annually • Insurance policy • Utilities providers • Service contracts § Reference the conference website and personnel for questions – don’t guess 13

Internal Control Basics Effective Policies Error Reduction Improved Compliance Increasing Confidence 14 • Accounting: Receipts, disbursements, deposits, reconciliation • Investments • Accountable reimbursement plans • Counting of the offering (two unrelated people; not treasurer, not financial secretary and done in the church) • Dual control/segregation of duties: Authorizers (dual at times), record keepers, custodians • Treasurer and financial secretary should not be combined, ¶ 258. 4 Book of Discipline (nor should they be family members) • Monthly reconciliation • Frequent & complete reporting: Transparency • Good audits or accounting reviews • Reduces risk of fraud • Churches stay focused on the mission • Avoid disruptions and distractions

Opportunity for Fraud & Error Recordkeeping Authority 15 Custody

Enablers of Fraud in the Church § No audits, financial records or bank account reviews § No required staff vacations § No criminal background, credit checks, or reference checks of staff & volunteers § Same person deposits and records bank deposits § No “term limits” for financial volunteers (Treasurer, counters, etc. ) § No financial expert on Finance Committee § Same person writes checks, deposits cash, and reconciles bank accounts § Related persons on Finance Committee or familial relationships with financial staff 16

17 Source: Donald Cressey

Segregation of Duties § Treasurer and Financial Secretary are separate § Counters are separate from Financial Secretary, rotate regularly § Checks should be signed by someone other than check writer § Checking account should be reconciled by someone other than check writer, person(s) recording cash receipts or counters § All church finance employees/volunteers must take one/two continuous weeks vacation 18 Source: Guidelines for Finance

Authorization Procedures § Financial policy and authority guidelines should be written and approved by the Finance Committee § Program leaders (with authority by Finance Committee) authorize expenses-not Treasurer § Invoices required for all payments from all accounts Treasurer disburses funds once invoices are approved § At least 2 persons listed as authorized signatures on all accounts 19 Source: Guidelines for Finance

Documentation § Counters use forms to record details of weekly offering and receipts § Financial Secretary records offering count details received from Counters § Offering totals given to Treasurer or Financial Secretary to record deposit § Every check issued is supported by written documentation and includes an authorized person’s approval § Timesheets used for hourly employee payroll 20 Source: Guidelines for Finance

Reconciliation § Counters reconcile contents of offering envelope to amount written on envelope § Quarterly giving statements provided to donors, discrepancies reported to someone other than counters or Financial Secretary § Bank reconciliation reviewer compares Financial Secretary’s deposit log to the bank statement to verify deposits 21 Source: Guidelines for Finance

Train Volunteers and Employees § Job descriptions and procedures detailing internal controls provided to employees and volunteers § Ushers trained on how to secure offering; office staff trained on how to secure receipts received during the week § Counter trained how to count offering § Treasurer and Financial Secretary and back-up volunteers trained on financial software § Fundraising groups trained on receipts and disbursements procedures 22 Source: Guidelines for Finance

Reporting and Review § Reconcile all accounts monthly § Someone other than Treasurer or Financial Secretary review bank reconciliations at least semi-annually • Includes statements, invoices, checks written, financial reports § Treasurer makes at least quarterly detailed reports of budget and designated fund activities to the Finance Committee § There must be an annual evaluation of financial records 23 Source: Guidelines for Finance

Annual Church Financial Evaluations § Annual evaluation of church records required § Local church audit guide § All accounts • • • General fund Building funds Designated accounts Investment accounts UMW may be done separately Any group operating under the church’s tax ID § External audit every 3 years for churches with budgets > $500, 000 § External audit annually if budget > $1 million 24

Local Church Audit FAQs § What counts as an audit? 25 Annual Church Receipts Recommendation Less than $500 K Independent, qualified member or volunteer performs procedures in Appendix A annually From $500 K to $1 M Every 3 years: External CPA performs procedures in Appendix A or GAAS audit Off years: Independent, qualified member or volunteer performs procedures in Appendix A From $1 M to $2 M Every 2 years: External CPA performs a GAAS audit (not agreed upon procedures) Off year: Independent, qualified member or volunteer performs procedures in Appendix A Over $2 M External CPA performs GAAS audit Source: Local Church Audit Guide

Local Church Audit FAQs § What counts as an audit? • Must be an audit in accordance with the Local Church Audit Guide (Appendix A) • Financial “Review” or “Compilation” is not sufficient, even when performed by CPA • • 26 Who can do an audit? Independent (may be internal or external persons) Qualified Not necessarily a CPA Source: Local Church Audit Guide

Local Church Audit FAQs § What should be included in the audit? • ALL organizations operating under the church’s tax ID number • Preschool, Boy Scouts, UMM, Pastor’s Discretionary Fund, Trustees, Memorial Fund, Endowments • UMW funds should be audited each year but presented separately from the church financial reports. • Designated Funds • Restricted Gifts – Temporary & Permanent 27 Source: Local Church Audit Guide

Preparing for the Audit § Meeting between Finance Committee, Treasurer, Financial Secretary, and Auditor before audit begins, and again after audit is complete § Finding an Auditor § Gathering documents § Set timeline and expectations, monitor progress 28

Fund Accounting & Investments § Fund accounting • Respects donor intent • Preserves resources for intended uses • May segregate authority over spending • Makes long-term planning easier § Investments • Must have policy • Governance • Diversification • Asset allocation • United Methodist Social Principles must be followed • Congregational transparency is key • Consider investing with the Council on Development 29

Manage Risk- it can break a budget if you don’t § Insurance policies • • • Property & casualty – Guidance from West Ohio Conference Board of Trustees Liability Review riders annually Generally overseen by Board of Trustees Remember Safe Sanctuaries § Church property list § Account/safe-deposit box signers: At least 2 § Computers and data: • Regularly back up computer records and restore backups on a periodic basis to test functionality • Implement a password policy that includes forced, periodic changes 30

Insurance Policy Considerations § Insurer should know church market, AND § Representations/Agent should know church market § Don’t scrimp on liability coverage • Rarely needed but when needed… § Know what you own 31 § Book of Discipline ¶ 2533. 2 –annual review against GCFA standards § West Ohio Endorsed: • Church Mutual • Brotherhood Mutual • United Methodist Insurance • Guide One* • Cincinnati Insurance*

Always and Never § Always: § Never: • Remember your contribution to • Withhold information from • Encourage discussion of • Perform all finance functions • Err on the side of reporting • Leave cash or checks in unlocked • Have two pairs of eyes on key • Share confidential donor ministry stewardship transparency processes and activities • Respect existing policies governing bodies yourself drawers overnight information beyond approved people • Delay sharing bad news • Conclude you alone are responsible for church income levels 32

Thank you!