Avoiding Financial And Legal Minefields

By Ivy Scarborough

Many years ago on a battlefield in Afghanistan, I was confronted with the prospect of crossing a minefield. I was in Afghanistan to lend support to and write about the mujahadeens’ war against the Soviet army. The mujahadeen were taking me to see a Soviet fort they had under attack. To get into position where it could be seen clearly we had to cross that minefield. The mujahadeen had crossed it several times before and knew approximately (!) where they could cross safely. I was second in line in the squad. I was told to simply step in the same places the mujahadeen scout in front of me stepped-a disconcerting directive since my size 13 feet were significantly larger than his.

Of course, I followed the path made by his steps scrupulously. I have used that experience many times in my lay preaching as a metaphor for what God expects of us in following Him. Now it falls to me to guide those of you in Christian leadership through some minefields of another sort. That experience can serve as a metaphor for this task as well. Many of the principles I discuss in the following four topical areas are either unknown to many Christian leaders or they are ignored. If you will follow them scrupulously, they will guide you through many potential minefields and serve as protection from loss.

Minefield 1: Financial Mismanagement and Misconduct

Churches are increasingly confronting problems with theft and misappropriation of church funds. This may include embezzlement, obtaining expense money for expenses never incurred, use of unauthorized checks, or forgery, as well as simple theft of church offerings. Among the most common hazards is the practice of leaving church money unattended either in the church, someone’s home, or a car rather than depositing it promptly in a bank. Furthermore, many churches do not regularly reconcile their books or have audits by qualified personnel.

Offerings. The handling of offerings should be conducted by at least two individuals (i.e., tellers) who are not related to one another either through family connections or by employment. Churches
should not permit someone in financial difficulty to serve in this role. Tellers should also be rotated periodically.

Two tellers should always be present whenever offerings are counted. This should be done on church premises. One teller should record the funds received and the other review the findings. Someone other than the teller should regularly reconcile the bank account. All checks should be stamped “For Deposit Only” immediately upon receipt. All money should be placed in a bag with only two keys. Cash should never be kept on church premises. All donors should receive periodic statements giving the dates and the amounts of the gifts that they gave.

Disbursements and Record Keeping. No disbursements should be made except by check or draft unless from petty cash. There should be two signatures on all checks over a stated minimum amount. Cash disbursements should only be made when someone in authority has approved and documented the payment. All blank checks should be locked up.

If a computer is used for church financial records the data should be carefully saved and stored on diskettes. Restrictions should be placed on access to the records.

The following checklist will help prevent an embarrassing loss. A “no” answer indicates an area of potential loss and where changes in procedure should be made.


– Is there a monthly or quarterly financial report to the congregation?

– Do you conduct an annual audit of your books by a CPA?

– Is the church treasurer’s position bonded?

– Does your church have insurance for the misappropriation of funds or a loss of church offerings?


– Are new church employees/volunteers required to complete and sign employment applications?

– Are references checked?

– Are treasurer, financial secretary, and those actually handling cash free of potential conflicts of interest?

– Are there more than two individuals actually counting/handling cash who are rotated on a regular basis?

– Is your treasurer restricted from making or changing policy and procedures in handling church finances?


Cash Control

– Does the church issue annual receipts of giving to its members?

– Are receipts and vouchers required for all funds expended?

– Are basic bookkeeping procedures followed?

– Do local charge accounts include individual receipts along with monthly invoices/statements?

Are checks stamped “For Deposit Only” immediately after being

– Is someone other than the treasurer responsible for deposits?

– Are cash receipts promptly deposited in the bank?

– -Are all disbursements made by check?

– Is countersignature

required for checks over $500?

– Are bank accounts reconciled by someone who is not authorized to make deposits or withdrawals?

– Are securities subject to joint control by two or more responsible individuals?

(Some information above and the questionnaire were used by permission from materials published by Brotherhood Mutual Insurance Company and Preferred Risk Mutual.)

Church Payroll. Churches are obligated to follow IRS and state laws and regulations in keeping track of employees’ payrolls as well as deductions. Every church with employees should obtain an employer identification number from the federal government.

Clergy who meet the IRS definitions of a minister are exempt from federal income tax withholding regardless of whether they report their income taxes as an employee or as self-employed. They must pay their taxes using quarterly estimating tax procedures unless they voluntarily submit to withholding.

All other workers should be categorized according to whether they are employees or self-employed. There can be serious penalties if a church characterizes a worker as self-employed and the IRS later decides the individual was a true employee.

Should your church have one or more non-minister employees, you must file Form 941 employer’s quarterly tax returns and you must also issue W-2 forms to your employees by February 1 of each year. Likewise you must file W-3 forms with the Social Security Administration. Furthermore, a form 1099-MISC must be filed by February 1 for each self-employed worker who is paid $600.00 or more during the previous year.

Make sure your church has a competent CPA well versed in IRS regulations that pertain to churches and consult him regularly on what is required for proper compliance with state and federal laws.

Minefield 2: Copyright Violations

Churches often breach copyright laws by the unauthorized use of published material. It is not uncommon for Sunday school books, hymnals, or other materials to be photocopied and used within the church in technical violation of the copyright laws. Though this rarely results in actual legal action being taken, it has that potential. The safer technique is to apply for limited copyright licenses which permit churches to reproduce for their own use certain religious publications or videos.

For example, a church, by payment of a fee to Christian Copyright Licensing of Portland, Oregon (1-800-234-2446), may obtain authorization to reproduce for their own use many religious publications. This license is restricted, however, to only certain publications or publishing companies, and it is not a broad all-encompassing license for many diverse literary works.

A similar license is available for videos from Motion Picture Licensing Inc. of Stamford, Connecticut. It is common for churches to rent or purchase videos which are then shown in a group setting even though, strictly speaking, this is a copyright infringement since the video was only intended for private or in-home viewing.

Churches should apprise members and employees of the potential for copyright violations and what must be done to avoid violations.

Similar rules apply to computer software. For example, most computer software programs are restricted to use on a single computer. Even if use is permitted by a purchaser on multiple computers, it would probably not be legal for software purchased by the church to then be used on the pastor’s home computer without obtaining written permission.

Copyrighting Your Work. All works produced by you or your church staff should contain a copyright notice. Though as of March 1, 1989, a copyright notice need not appear on a document in order for it to be copyrighted, this is still the preferred technique. A copyright notice should include the year of publication, the name of the owner, and the word or abbreviation for “Copyright” or a letter c within a circle. If a work was created by employees of the church it will probably be the property of the church since it was produced as a “work made for hire.”

Minefield 3: Liability Of Officers And Directors

Regardless of what they are called-elders, trustees, deacons, etc.-a church’s governing board may be legally responsible for decisions they make or, in some instances, do not make.

Most churches assume that if they have liability insurance this protects their directors and officers. This is usually not the case. Public liability insurance protects the church from claims made by individuals or entities who allege bodily injury or property damage caused by the church’s negligence or conduct. However, claims against the directors or officers of the church for failure to perform their duties are not covered by these policies. A separate policy known as a director and officers policy is needed to protect these individuals.

Some officers and directors are protected in some states by what are known as limited immunity statutes. These basically provide that officers or directors who are not compensated for services to a nonprofit organization have limited immunity for their actions, unless their conduct was willful or wanton. However, even if that immunity is available, the cost of defending a claim can be expensive, running into thousands of dollars. Even if a church wins the lawsuit, the financial drain on its resources may be substantial. Furthermore, if a director or officer is found liable, damages can be high.

Other protections from this kind of liability include making certain that your board members are thoroughly oriented to their duties and recognize their responsibility to exercise due care in their positions. Unfortunately, many board members do not recognize the gravity of their role, nor do they understand all of their responsibilities. They should especially be made familiar with the
charter, bylaws, and any policies or procedures of the church. Furthermore, their understanding of their role should be enhanced at regular intervals with specific training which may include briefings by lawyers familiar with this area of the law and, in some cases, CPAs.

Conflicts of Interest. There should be a written church policy against conflicts of interest as well. It is not uncommon for churches to do business with board members individually or with businesses owned in whole or in part by board members. If this is done, there should be strict and clear procedures for review of the proposed contract to ensure that the church is being fairly treated.

It is not advisable for a church to make loans to directors or officers out of corporate funds. If they do so, they may be liable to the corporation if the loan is unpaid.

All contracts of the church should only be signed after strict procedures for approval have been complied with. When a director or officer signs a legal document on behalf of the church, he or she should state this in writing on the legal document.

Minefield 4: Church and Pastoral Insurance

Selecting an Agent. There are two types of insurance agents. The so-called “captive” agent is a paid employee of a particular insurance company, whereas an independent agent will likely represent several insurance companies. Some feel there is an argument in favor of using an independent agent for the simple reason that he or she is more likely to provide you with objective information about a variety of policies and companies. Your insurance agent should also be someone who is very familiar with church insurance coverage.

Never select an agent simply because he or she is a member of the church or is well known in the community. For that matter, a church should never select any professional solely for such reasons.

Before selecting an insurance company, have the agent provide information on the background and services of the insurance company he recommends. Make certain the company is financially sound. The A.M. Best Company rating is considered an excellent standard for determining financial strength. Most importantly, investigate the insurance company’s responsiveness to its other church clients and its willingness to pay claims.

Coverage should focus on five potential areas: property and property liability coverage; automobile or vehicular policy (which will be needed even if the church does not own a vehicle); workers compensation; an umbrella policy; and church accident policies which would cover medical expenses for injuries during church activities. Special endorsements can be added for directors and officers liability, pastoral and employee counseling, day care and Christian school liability and coverage. Be certain the policy fully covers claims arising out of sexual misconduct.

Making a Claim. Though it may sound harsh, never assume that an insurance company is your friend. Recognize that the moment you have a claim, the insurance company has, in a very real sense, a vested interest opposite to yours. You need to have the claim paid if it is legitimate, or defended if it is not. The insurance company may want to avoid expenses and payment of a claim. Sometimes this results in subtle if not overt conflict between the insured and the insurance company. Verifying an insurance company’s record in paying claims is the best way to ensure this does not happen to you.

Always report claims promptly and thoroughly. If you first report the claim verbally, follow through by reporting in writing and keep a copy of your letter. Be prepared in the case of property damage claims to have independent parties appraise the damage. Do not necessarily rely upon the statements of the insurance company’s own appraisers. Typically it is a good idea to get two repair estimates for property damage, whether to an automobile or building. It is important to make certain that the extent of the damage is fully known and understood. It is not uncommon for certain damages to not be discovered until after a claim is settled, making it impossible to recover those additional damages.

When a possible liability loss occurs, similar guidelines apply. Notify the insurance company promptly and give them thorough information. Remember that most policies require notification within either a specified time or a “reasonable” time. Failure to give this notice may result in the

insurance company denying coverage.

Try to avoid making statements that suggest the church is responsible, or that the claim will be fully paid, until all the facts are available and the insurance company has had an opportunity to investigate. It will be the company’s decision, in any event, whether to pay the claim. Simply assure the party concerned that the claim is being reported to the insurance company and that they will be in touch.

There are relatively rare instances in which an insurance company may deny a claim when the church leadership feels it rightfully should be paid. This development can put you at odds with your own insurance company. But if you believe the church, or its employees, or others acting on its behalf, were responsible for the loss or injury; by all means, stand by your principles and insist that your insurance company pay the legitimate claim, even if that means having to change insurance carriers later.

Remember, should the church, an employee, or the pastor be sued, your insurance company will be obligated to pay a lawyer to defend the claim. This is one of the great advantages of having liability insurance coverage. Even if the church is completely free of any wrongdoing, the cost of defending against a misbegotten claim can be substantial. Finally, expect the lawyer and your insurance company to keep you informed of the developments during the lawsuit.

The following was used in preparation for this article and is recommended for additional reading: Church Law and Tax Report: Risk Management for Churches by George R. Grange II, Richard R. Hammar and James F. Cobble Jr.

Ivy Scarborough is an attorney and mediator in Jackson, Tennessee, who specializes in personal injury and wrongful death cases. He is a friend of the Tennessee District United Pentecostal Church. He may be reached at (901) 668-0037 or xplz22a@prodigy.com