How thorough should parish financial reports be?

In November, my church's annual financial report appeared in the parish bulletin.  It showed that expenses exceeded income by about $6,000.  The report was a balance sheet.  It included a number of categories of parish income (such as regular weekly giving, the Christmas and Easter collections, income from religious education, and gifts to the parish).  It also included a variety of expense categories (such as salaries, fixed expenses, operating expenses, etc.).  The pastor used the $6,000 shortfall to encourage parishioners to be generous in their contributions to the parish.

I was interested to know how the parish made up the shortfall.  The balance sheet did not say.  The pastor is a good man, however, and he would not stiff the parish's creditors.  I presume that the parish had a bank account from which the pastor could withdraw the necessary $6,000.  But the balance sheet did not explain.

This exposes a problem that churches face throughout the USA (and probably many other places).  It is the problem of how thoroughly to report on church finances.  There is no national standard.  In the absence of such a standard, parishes routinely issue balance sheets.  But balance sheets only show part of the story.

Recently, however, I read an essay that offers a better way.   The essay was entitled "Stewardship: Financial Control and Accountability," by James W. Thompson.  Thompson just retired as Professor of Accounting and Taxation at St. John's University in New York.  His essay appeared as Chapter 12 of "The Concise Guide to Catholic Church Management" (Notre Dame: Ave Maria, 2010). 

Thompson endorses a three-document method for reporting on a parish’s financial well-being.  A mere balance sheet will not suffice, said Thompson.  In addition to it, he argues, the good pastor will also issue a “Statement of Activities” and a “Cash Flow Statement.”  If my own pastor had used the three-document approach recommended by Thompson, it would have explained how the parish made up the $6,000 shortfall.

First of all, Thompson says that a true Balance Sheet differs from a statement of income and activities. It is rather a one-time snapshot of parish assets and liabilities. When the snapshot was taken, the parish’s total assets equaled its liabilities plus the remaining assets. For example, the parish bank account increased by a certain percentage.  It accrued interest.  Then money was withdrawn to pay the $6,000 shortfall.  The bank account was a parish asset, and would have appeared on the balance sheet.

By contrast to the Balance Sheet, the Statement of Activities shows financial differences over a period of time. In a given year, the parish earned something from its investments, and paid a certain amount on its loan or mortgage. The certain amount – i.e., the portion that was newly earned or recently paid off – should appear on the Statement of Activities (but not on the Balance Sheet).

The third document that pastors ought to publish is the Cash Flow Statement. Thompson defines it as “information concerning the sources of cash and uses of cash.”  The sources and uses may come from operations, from investing, or from financing.  In my parish, the $6,000 deficit would have appeared as a borrowing activity.  The pastor borrowed the money from the parish bank account to make up the deficit.

In short, Thompson's three-document method for reporting on a parish's financial well-being presents a sound standard.  If my own parish had embraced it, parishioners would have known how the parish made up the $6,000 deficit in its balance sheet.

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Comment by Jim Lundholm-Eades on January 31, 2012 at 4:59pm

No matter what is actually in the report itself, transparency can be practiced in two ways. In the past being transparent is "i told them" or "I gave out the report." that is far less than what is expected today. The meaning of transparency has shifted to "I engaged them" or "they had the opportunity to engage with each other and with me/us about the report." I just encourage parishes and diocese to move toward a model of real engagement rather than simply " I told them."

Comment by Mark F. Fischer on February 1, 2012 at 12:41pm

Thanks for the comment, Jim.  You are right to emphasize the importance of engaging people in a discussion about parish finance reports.  Engagement is an opportunity for quality control.  But a finance report is also an chance to show that parish officials are being good stewards.  So it is important that the report be thorough and accurate.  That is why I recommend the James Thompson three-report format (balance statement, statement of activities, and statement of cash flow).  If a parish financial is not thorough, any opportunity for engagement will consist mainly of complaints about the poor report.

Comment by Jim Lundholm-Eades on February 1, 2012 at 4:01pm

We are on the same page here Mark. How many Parish councils and Finance council meetings I have been to where the only report is a budget report. This obviously falls way short of any standard you or I wold suggest. you are right to emphasize the three report format. I also like to be clear that investments and/or debts all need to be reported. That seems obvious. However, in so many places I have seen reports that conveniently leave out items like debt to insurance and retirement programs, even capital debt. I have heard parish leaders declare that they do not want to include investments in their reports "in case the diocese finds out." Such practices are really so counterproductive to good stewardship. So, in addition to what we are both saying, Mark, I call for completeness in financial reporting for parishes, schools and diocese'. 

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