Christian Leadership Alliance
| 
1 of 3
Is Your Church Guilty of a Conflict of Interest?
Does your church participate in any conflicts of interest? Do you know what a conflict of interest really is? What are the results to the church if there are conflicts of interest? These questions should be carefully considered.
In 2004 the Internal Revenue Service (IRS) determined excess benefit transactions had taken place between a church and its pastor, his spouse, his two sons and a son-in-law. Expense items on the church's books lacked documentation and were therefore considered taxable income by the IRS. The church had not treated them as such.
The specific expenses included personal use of cell phones, church vehicles, a church owned house (not a parsonage) and church credit cards. Because of the lack of documentation to show business use, the IRS claimed personal use. Along with the requirement to reimburse the church for the personal expenditures, the IRS assessed the statutory penalty of 200 percent of the excess benefit because the transactions were not corrected during the taxable period.
Various scenarios abound
We have seen various scenarios of individuals making no-interest loans to relatives or friends or granting funds to organizations run by relatives with no accountability. While most of these have not resulted in jail time or large penalties, it doesn't make it right. It also doesn't mean that they won't be required to give account of their actions at some time.
A conflict of interest exists when a church employee or board member has a personal interest in a transaction with the church that would be in direct competition with the interests of the church. Examples include a church loan to a pastor or a church hiring the contracting services of a board member. Not all transactions with someone considered to be an "insider" are conflicts of interest.
A related party transaction is similar in nature but has several key differences. A related party transaction is approved by the governing board with the interested party abstaining from any related votes, as well as discussion, except to provide relevant information.
Also, if the transaction is in the best interest of the church and is supported by competitive bid information it is a party transaction.
A related party transaction is fully disclosed in any appropriate places such as the footnotes to audited financial statements. Related party transactions are acceptable and they may serve the interests of the church. If the church is able to secure services at a discount because of a relationship within the church, it makes sense to do that. Just make sure that the related party criteria are well documented.
635 Camino de los Mares, Suite 216, San Clemente, CA 92673 · (949) 487-0900