This post was last updated on May 11th, 2021 at 08:45 am.
What if I told you the monthly prices for church accounting services can range from $250 – $600 per month? You might be thinking that we used the wrong title for this blog post. How can paying that much save the church any money? You may even be inclined to offer a better title for this post. Read on!
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We need to dig deeper into the numbers and other benefits. Let’s first go over the intangible benefits. These are benefits that are hard to put a price tag on. Next we will go over the tangible benefits which we can put a price tag on. Then we will see how the monthly costs stack up when a church uses their own bookkeeper versus hiring an accounting service.
Intangible Benefits Using Church Accounting Services
There are quite a few intangible benefits using an outside accounting service. Intangible benefits are typically ones you can’t put a concrete price tag on and/or are difficult to measure. We will outline a few of these to give you an idea of some of the things to consider.
Services for church accounting reduces fraud
One of the typical responses about fraud that we often hear from churches is — we have never had fraud. Yes that might be true. Or another is, fraud will never happen to us. Yes that might be true too. However, are you willing to take that chance? Once fraud happens, donations tend to dry up, church members may leave, or worse, the church closes!
Smaller vs. larger organization which one is at risk for fraud?
Smaller to mid size organizations are more likely to have fraud than larger organizations. According to the Association of Certified Fraud Examiners (ACFE). Almost 32% of small organizations– defined as having less than 100 people– are the highest risk for fraud. The average loss is $147,000 when fraud happens. The five most common areas of fraud were billing fraud, corruption, check tampering, skimming and expense reimbursement fraud. The majority of the perpetrators worked in the accounting area of the organization, giving them easy access to the money.
Church accounting services reduce the possibility of fraud in several ways. Church accounting services use tight controls on how money is disbursed, reimbursements are paid, bills are paid, and how money is received. Notice these controls are in the same areas mentioned above, where fraud typically happens — billing fraud, check tampering, expense reimbursement fraud, and skimming.
Accounting services have repeatable and consistent internal controls for entering accounting transactions. In smaller organizations– less than 100 employees– 42% of fraud cases that happen are because of the lack of one or more internal controls. We’ll go over just two of these in more detail to give a picture of how some of these schemes play out.
Expense reimbursement fraud
For example, an accounting service will require the church to provide expense sheets, properly filled out and signed by two people from the church before they disburse money. Many smaller churches will not have this accounting control in place and would just disburse the money. After all, they know the person requesting the disbursement and they would never lie, right?
Manual checks are a fraud nightmare
Another fraud nightmare is using manual checks. Manual checks are one of worst ways to pay bills for an organization. Why? Someone can write two checks out, where one pays the regular bill, but the second is paid to the person directly. They would code this second check as an extra payment on the bill. The only way to figure out what is happening, is to either review canceled checks– who does that anymore?– or match the checks written to the filed bills, if you have them. Most of the time the person throws out the bill and keeps no record of it, furthering covering their tracks.
Church accounting services will set up internal processes like bill pay, ACH payments, filing the bills for each organization, and reconciliation of all checkbooks. These internal processes and others, ensure bills get paid on time. Only the bill’s payment is sent and nothing extra to anyone else, which creates a very easy audit trail. This is not to say fraud can’t happen, but it will be very very hard for it to happen.
In accounting — accuracy is the key!
What’s needed for accurate bookkeeping for churches? The first thing is consistency when recording transactions. The other element is having a person well versed in fund accounting, specifically for churches. Both of these work hand in hand to ensure accuracy and to give a true financial picture to the church council. Let’s break these two important elements down.
Consistency in bookkeeping
Accounting is all about consistency. The IRS calls this the the Duty-of-Consistency Doctrine (DOCD).
The duty of consistency is an equitable tax doctrine which prevents a party from prevailing in a court proceeding by taking one position and then taking a contradictory position in a later case. It applies when there has been a representation by the taxpayer on which the IRS has relied followed by an attempt after the statute of limitations has run to change the previous representation or to recharacterize the situation in a way that harms the IRS.Courtesy of Parker Tax Publishing.
Simply put, a party –like a church– can’t change the rules on how they record transactions from one scenario to another. For example, if you recognize income using the date on the check, but towards the end of the year, you recognize the income when it’s delivered to your office, this would be a DOCD violation. Because the process changed for when the church recognizes the income. It first used the check date, then changed to using the delivery date. Why would this matter?
Because when you recognize it when it arrives, this could push income off into the new year. This lessens the tax burden in the current year according to the IRS, thus it harms the IRS. Take a check that was written out on Dec 26th, but does not arrive until Jan 2nd the following year. Instead of recognizing it on Dec 26th, like you did with all the checks throughout the year, you now recognize it on Jan 2nd. But why does it matter when churches don’t pay taxes, anyway?
Churches pay taxes…? No they don’t!
There are times when churches do pay taxes, although they are tax exempt. Typically it’s on the Unrelated Business Income Tax (UBIT). A good example of this is rental income. If the church holds any type of mortgage on the property, then any rental income is taxable. This includes any loans for remodels as well. The other possibility is if they do a considerable amount of renting. Then the rental income is also taxable. The DOCD principle applies to all accounting transactions, and enforces consistency. So if you recognize rental income based on the check dates throughout the year, then change the process to recognize it when the checks are delivered, then the DOCD principle is violated.
The lesson here is is to ensure that every transaction entered follows the same methodology of similar transactions. Next, we will talk about the frequency of changing the person in the bookkeeper position. When people change positions often, this is much harder to follow. This leads us to the next area of having a person well versed in church accounting.
Position for bookkeeper changes frequently
In many churches, the bookkeeping position changes frequently. In most cases these frequent changes are detrimental to accounting consistency. Inconsistency can happen depending on how transactions are entered. One bookkeeper will enter a transaction one way. A different bookkeeper would enter a similar transaction differently. This change in process, makes accounting reports inconsistent.
In accounting, the majority of the time, entering transactions is not black and white. There’s leeway in how transactions are entered provided they follow the rules of GAAP, IRS & FASB, and the transactions are consistent with each other. Let’s use an example.
One bookkeeper uses the check writing module to enter their monthly checks. This module uses the cash based accounting method. The church changes bookkeepers. The new bookkeeper decides to use the accounts payable (AP) module to enter in invoices for the monthly checks. The AP module uses the accrual based method of accounting. The new bookkeeper just took the organization from a cash based to an accrual based accounting system. They probably did it without realizing how big of a change that is. Additionally it violates the DOCD principle.
When an accounting system goes from one method of accounting to another (ie cash based to accrual based), there are additional transactions that you must complete. For example, any prepayments for rental income would need to be applied as a short term liability, instead of the month you received them in. There are multiple other transactions that need to happen for a methodology change of this magnitude to be correct. To say the least, the reports would not be correct. At worst, failing an audit would revoke tax exemption status, more than likely.
Churches can’t always find the accounting expertise needed
Many times in small to medium organizations, they are at the mercy of the available people’s skill sets. Whether they are paid employees or volunteers, church accounting in general, requires a specific skill set that can take years to learn.
The learning curve for accounting in general, and fund accounting in particular, is steep and long. Even if the person has some accounting background from school or on the job training (OJT), it’s a difficult skill set to acquire. Most of the time the person moves out of the position before they learn half of what they need. In fact some CPA’s avoid church accounting altogether. Why? They vaguely understand it and prefer to not even mess with it, as there’s little reward.
Improving ‘controls’ for the organization
We touched on this a little, but it is worth diving a little deeper. When using an outsourced accounting service, the controls they put in place help eliminate internal organization problems and fraud. Some examples may include not getting all bills entered in before council meetings, best practices in handling payroll or complex accounting transactions like mortgage payments, and so on.
Getting transactions entered in a timely manner is important. Many churches rely on accountants that are either volunteers, or are paid with set hours per week. This can put a strain on getting the work done efficiently and correctly, every month. Volunteer schedules can change at the drop of a hat. Paid workers only have so much time to dedicate to the books, otherwise the church goes over budget for their salary. Accounting is something where time limitations should not dictate accounting processes. In other words accounting transactions are entered no matter how long it may take. Church accounting services alleviate issues where transactions are not entered for the month.
Experienced specialists at accounting services can handle complex transactions and corrections. Many times church accountants may not have the expertise to do a complex transaction. Church accounting services deal with these every single day, repeatedly. Whereas the church accountant may do one or two every couple of months. The repetitious nature of entering transactions is where accounting services have an advantage over the everyday church bookkeeper. The accounting services do these transactions every day.
Restricted funds resources are appropriately accounted for
Restricted funds are where churches could have trouble in keeping the accounting books straight. These restricted funds require that all resources are used for the purpose that the not for profit has promised. When restricted funds resources do not follow the church’s promise, dire circumstances can happen, including lawsuits.
Accounting transactions against these restricted funds have to be handled appropriately. The accounting transactions, when entered correctly, ensure the reports are correct for the various missions and/or granting authorities to review. When entered incorrectly, this can raise red flags to donors, granting authority, and so on.
Accounting services ensure that the proper principles of GAAP are followed for restricted funds. These principles give the organization credibility and shows donors they are ethically and morally living up to their promise. The church can show how it’s following through with each mission. In other words, they are practicing good stewardship and are fiscally responsible.
Tangible Benefits Using Church Accounting Services
There are quite a few tangible benefits that hiring an outside accounting service can provide. These would be things that we can put a pretty definitive number on the received benefit. Things like reduced payroll cost, hours saved– which translates to money per hour, and taxes paid by the employer. Let’s go over some of these benefits.
In-house accountant salary vs. cost of church accounting service
Your church may be fortunate to have a volunteer doing the church’s books, but rarely is that the case. Let’s look at the paid internal church bookkeeper.
The average entry level wage for not for profit bookkeepers is $25,000/year. This does not include all the taxes and other benefits that employers must pay as shown by the table below. Add to the annual salary, the $17,430.00 for the items listed to get a total compensation of $42,430.00 for an in-house church bookkeeper. On the other hand, the annual cost of an accounting service would be approximately $6,000.00. This is a cost savings of 85.86% annually.
|Benefits Paid by Employer||Avg. Percentage||Annual Cost on $25 K Salary|
|FICA and Social Security||7.65%||$1,908.00|
|State Unemployment Tax||1% of salary||$250.00|
|1 Health Care (smaller employers)||62% of premium||$11,618.00|
|1 Health Care (larger employers)||71% of premium||$13,927.00|
|Retirement (Simple 401K)||3% of salary||$750.00|
|2 PTO (vacation, holiday, & sick time)||Varies||$2,404.00|
|3 Total for Benefits||$17,430.00|
|Add Annual Salary||$25,000.00|
|Total Salary + Benefits||$42,430.00|
Note: The 1 denotes that the organization would choose one of the values for health care, not both depending on their size. The 2 denotes that we used 200 total hours for PTO per year and multiplied that by $12.02 hourly wage. The 3 denotes that there could be benefits not mentioned here that you need to account for like disability, eye, and dental insurances.
What do all these numbers mean in the end?
Keep in mind these figures were based on a bookkeeper’s salary and not an accountant’s salary working for the church. Accountants have a much higher starting entry salary of $40,000/year.
In fact, the bigger the separation between the $6,000.00 for the paid accounting services and the salary-benefit package for the internal church employee, the greater the savings. Here’s another way to look at it. For the same amount of money you’d pay a bookkeeper for one year, you could purchase over seven years of accounting services. Or you could buy 22,842 bibles at a cost of $12.74 per book for seven year’s salaries.
Now that we broke down the cost for an employee bookkeeper, let’s restate the initial question from the beginning of the post — How can paying that much ($6,000/year) possibly save the church money? You can see when we figure out the concrete cost– not to mention the intangible benefits– that $6,000.00 per year is a steal!
The one caveat is that your organization may pay less or more than $6,000 depending on size, accounting complexity, and so on for an accounting service. If its less, than great! The savings is only better than illustrated. If it’s more, the organization would still save a lot of money, just not quite as much as illustrated. One thing for sure, is that an accounting service will always save money over a bookkeeping employee — 99% of the time.
What about volunteer bookkeepers that work for free?
It is great when people step up to help out the church in various areas. We love our volunteers. The question is, can they replace a church accounting service with the same level of expertise, knowledge, and internal controls? The answer is — it depends.
Volunteers must be screened the same way you would screen a paid employee for their abilities in the accounting areas. Just because the person has a CPA license or an accounting degree does not mean they can do the job correctly. How can the church test a person on their accounting ability, when they themselves, don’t fully understand the job’s functions? This is one of the main reasons unqualified people are placed in accounting positions.
Fund accounting is a specialized niche in the accounting world. Because of this, many people that have an accounting degree get into it and find out later, they are in way over their heads. Similarly, CPA’s that have worked in the business side of accounting, also find themselves having a hard time adjusting to fund accounting. However, CPA’s do have an edge on figuring it out, versus a person that has only an accounting degree or some bookkeeping experience.
Side note on CPA’s as bookkeepers
Let’s talk about CPA’s a little. As with any profession there are sub specialties. After all, just because a person has the title of MD behind their name doesn’t mean you would allow them to perform surgery on your brain, would you? In accounting, the same thing happens.
There are CPA’s that only file taxes as their day-to-day work. Others may be forensic CPA’s. For both of these– like fund accounting– the skill sets required are vastly different. Because of all these reasons, the church must be picky with who they allow to volunteer in this capacity and screen their skill set thoroughly. In other words, just because they know how to do forensic accounting, doesn’t mean they can pick up the task of bookkeeping as easily.
Church Accounting Services Summary
In this blog post we went over the tangible and intangible benefit(s) of hiring an accounting service– things like salary and benefit savings– and compared that to paying the $6,000 per year cost for accounting services.
We spent a lot of time on fraud. Fraud in a church is a horrible and gut wrenching thing to go through. And while no organization is 100% immune from it, there is a lot that can be done to help prevent it. Churches can hire accounting services that put in controls and are consistent in their daily operations, to help prevent fraud.
We will leave you with a some last thoughts in regards to church accounting services…
If there is still doubt about how prevalent fraud is you may want to check out this 2018 annual report put out by the ACFE. Use the matrix in the table above and figure out all the concrete numbers to compare accounting services to an internal bookkeeper. Tangible and intangible items should both be considered when making this decision. And while we can assign concrete numbers to some of these benefits, know that is not always the case, however, it helps to fully think through both intangible and tangible benefits completely.