for Henry

Chapter II. Literature Review

In a 1993 study completed by Peter Booth entitled “Accounting in Churches: A Research Framework and Agenda,” the researcher suggested that a lack of significant study has been done to analyze the accounting practices within religious organizations. He claims “the accounting literature on churches is almost exclusively concerned with practices in Western mainstream churches. Within this narrow focus there is a fairly extensive professional literature, which generally focuses on prescribing ‘good’ accounting practices, but very few research-based studies that try to explain accounting practices in use” (Booth, 1993). It is this statement that makes this research-based study imperative. Booth concludes this section of his research by conducting a literature review of his own. He identifies three main themes in his literature study, two of which are of interest to this current study being conducted. First, the prevailing argument of the literature Booth studied claimed that the accounting practices in religious organizations were inadequate compared to the accepted commercial practices. Finally, the overwhelming suggestion of the body of research reviewed is that the accounting within religious organizations needs to be adapted to the special circumstances of churches.

Next, Booth moves on to his proposal for a research agenda regarding accounting practices in churches. The proposed framework points to three key concepts that must be addressed by anyone concerned with the accounting practices of the church. First of all, the researcher must be sensitive to focus the actions in religious organizations around the religious beliefs of the organization. Next, it is necessary to understand the role that the actions of the personnel involved plays in how beliefs are put into practice in all areas of the organization, including accounting. Finally, the area most pertinent here is the idea that membership size and financial resources constrain much of the practices of the church.

The major theory Booth discusses is the idea that a divide exists between the “sacred” and “secular” functions of the church. According to this theory, religious organizations operate with a tendency for tension between the sacred or religious pursuits of the church and the secular or support activities of the church. This tension creates an implied value system with sacred activities receiving the priority. For this reason, Booth’s study provides the foundation behind the importance of more research in the area of accounting for churches.

The next major study with implications for this body of research is the study done by Duncan, Flesher and Stocks regarding the effects of church size and denomination on systems of internal control. Duncan, et. al. 1999 works from the framework established by Booth. Given Booth’s framework, the researchers establish two hypotheses that were tested through an experimental research study. First, the idea that church resources are a major constraint to the level of internal control use in churches was tested by evaluating internal control scores of churches separated into groups based on size of membership. Therefore, the first hypothesis tested was that there is “no significant difference between the internal control evaluation scores of large churches and small churches” (Duncan, et. al., 1999). The second hypothesis set out to test the idea that denominational polity affects internal controls.

With this research, the hypotheses were tested through the use of an internal control questionnaire (Appendix I) designed to evaluate churches based on recommended controls. In all, data was collected from 1,200 churches in three major denominations (Presbyterian Church, United Methodist Church, and Southern Baptist Convention). Internal control scores were based on how many of the 40 control questions were answered positively. Through ANOVA, the internal control evaluation scores were found to be statistically significant according to church size. Larger churches posted higher scores than small churches across each denomination. The major downfall for smaller churches was in the area of separation of duties. With a smaller pool of employees to pull from and limited resources to pay those employees, a proper separation of duties among individuals was lacking in these organizations.

Finally, when it came to the testing of internal controls based on denominations, the scores were also found to differ significantly. Those churches with a governing body at the denominational headquarter level were found to have higher scores than those that conducted their business functions at the more local level. This is a key implication of which the more autonomous churches need to be made aware.

In summary, Duncan, et. al’s study is essential in understanding the use of internal controls in churches. Some significant controls were deficient in a majority of smaller churches. For instance, safeguarding cash, the use of a petty cash fund and check signing procedures were three of the main controls that were lacking in many of the smaller churches. Duncan, et. al. also offer suggestions for further study including examining the effect of beliefs on the quality of internal controls and the effects of church size and denomination on information systems and financial reporting processes.

Another study that has implications for this current body of research is the literature produced by Irvine (2005) entitled “Balancing money and mission in a local church budget.” Her study attempted to explain the budgeting practices in a local church setting. Additionally, she attempted to explain the interplay between the sacred mission of the church and the secular nature of accounting. The researcher conducted interviews with church leaders and studied the minutes of church meetings. The main emphasis of her research can be summed in the following questions posed by the study: “Is accounting merely tolerated as an undesirable but necessary intrusion into the sacred business of church?” (Irvine, 2005). This study emphasized the church leaders’ perceptions and use of the accounting.

The conclusions drawn from this study relate most formally to the implications of research questions herein implied. First, the researcher concluded that in many aspects the perception of accounting and its use is closely tied to the sacred mission of the church and viewed as a principal component of the church. For instance, Irvine made conclusions in the areas of structure, staffing and budgeting.

Some of her conclusions are next addressed. When it came to the area of structure, the church was given a hierarchical structure that allowed every area of the ministry, including accounting, to be subject to the governing body or leader. Additionally, when staffing the organization was concerned, staff members were considered to be lay-people who were serving in the ministry and had little input in the financial operations. The senior pastor and accounting personnel were usually the only staff members with information on financial matters. Finally, in the area of budgeting, the researcher states, “Far from being perceived as a secular intrusion into the sacred business of the church, the budget was treated as a very important document” (Irvine, 2005). Furthermore, the mission and vision of the church is captured within the budget. To explain, most churches, in Irvine’s study, would tailor their budget so the necessary money to support their mission was appropriated. However, a fine balance was cited between tailoring the budget to meet the needs of the organization and placing too much emphasis on the budget.

In summary, Irvine’s study suggested that most churches do not experience the previously mentioned theory of the “sacred” and “secular” divide. The researcher concluded that accounting plays a vital link between the church’s mission and the means of accomplishing this vision. The belief system played a significant role in the perceptions of accounting among those interviewed. This information taken with the studies by Booth (1993) and Duncan et. al. (1999) provides an excellent foundation from which to build in this area of research. As a result, the research described next was designed.

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