Budgeting in Roman Catholic Dioceses of England

Introduction and Background

Supporting the activities and operations of churches and religious organizations is a complicated and serious financial challenge. The activities of these organizations, combined with their limited financial resources, result in a need for careful attention to financial management (Macpherson 1998). Further, as a result of occasional media reports of financial irregularities in some religious organizations, there is an increasing call for financial accountability in almost all organizations today (Hoge 1994). Diocese members want to know — and have a right to know — how and where church funds are spent. Beyond accountability and financial reporting, there is a need for assistance in all aspects of financial management (Armacost & Schnelder 1989).

Budgets are an integral part of virtually any type of organization's success, whether the organization exists to make money or to provide a public service. Dioceses are classified as not-for-profit organizations in that their income comes from the contributions and fund-raising efforts of their members. The diocese therefore provides a unique environment in which to contextualize the study of accounting and budgeting. Many dioceses are supported by professional accountants and bookkeepers — some as paid employees, others as volunteers. Because the number of clergy is decreasing, financial management functions are being spread thin and there is less control; therefore, there will likely be increasing pressure from parishes for improved budgeting functions (Armacost & Schnelder 1989).

The investigative base of this research project extends to all Roman Catholic Church dioceses in the United Kingdom, but concentrates on the budgeting process as it exists within a representative sampling of these religious organizations. This research project identifies who is involved in the budgeting process and whether organizational structures interfere with that process. An examination of how budgeting is done is followed by an assessment of its contribution in terms of the broader population of dioceses.

Overview of Budgeting Concepts

A diocese is a vitally important part of the community in which it is located, but these institutions are comprised of people rather than buildings. Individual members contribute considerable time and expertise to developing programs and services that are relevant and appropriate for the unique needs of their constituents (Levi 1989). Many such members are personally involved in fundraising efforts. Diocese members provide technical assistance in these areas and have developed an extensive network of contacts with the local business community (Bryk, Holland & Lee 1993). In order to take full advantage of this expertise and business acumen, it is important to understand what the budgeting process is intended to accomplish and how it can be used to help achieve an organization's goals (Bryk et al. 1993).

In their article "Financial Management in Church Operations" (1989), Armacost and Schnelder report that "in a diocese organized as a single corporation, financial management procedures similar to those previously described could be mandated for all parishes both under civil and Canon Law" (p. 36). However, in dioceses where the parishes are separate corporations, it is unlikely that such requirements would be made, although they are fully justified under Canon Law. Futcher and Phillips (1986) cited the need for using modern financial management techniques — specifically budgeting — in churches. Similarly, Reese (1992) assessed the quality of financial disclosure at the diocesan level of the Catholic Church. These authorities have argued for broader training of accountants and auditors so they can serve as business advisors, an initiative that certainly applies to religious organizations as well (Armacost & Schnelder 1989).

According to Needles and Powers (1998), a "budget" is simply a quantitative plan of activities and programs expressed in terms of assets, liabilities, revenues, and expenses. In order for any organization to succeed in accomplishing its goals, it must be able to control expenses and operate efficiently. "One of the more effective ways of controlling expenses," they note, "is to use operating budgets. An operating budget reflects management's operating plans and consists of detailed listings of projected selling and general and administrative expenses" (Needles & Powers 1998, p. 17). The participants in the budget-preparation process are primarily concerned with carrying out the plan, or with other quantitative terms such as units of product or service (Siegel & Shim 1995). Some of the traditional benefits associated with the budgeting process include: (1) planning; (2) communicating company-wide goals to subunits; (3) fostering cooperation between departments; (4) maintaining control by evaluating actual figures against budget figures; and (5) revealing the interrelationship of one function to another (Siegel & Shim 1995).

Although the financial statements published as a result of the budgeting process are the most widely visible product — and the ones with which the public is most concerned — these financial statements represent only a small part of the overall budgeting process. Generally speaking, the accounting data and most accounting reports that make up the budgeting process are generated solely or primarily for a company's managers. These management reports may consist of summaries of past events, forecasts of the future, or a combination of both. Preparation of these data and reports is the focus of managerial accounting, which consists mainly of four broad functions: (1) budgetary planning; (2) cost finding; (3) cost and profit analysis; and (4) performance reporting (Shillinglaw 2004).

Types of Budget Statements and the Budget Process

The first major component of internal accounting systems for management's use is the company's system for establishing budgetary plans and setting performance standards. The establishment of these performance standards also requires a company to develop a system for measuring actual results and reporting the differences between actual performance and the established standards. This budgeting process leads to the establishment of specific organizational plans, which are then translated into action with varying degrees of efficiency. Statistical analysis, quality controls, and trended data are typically provided to management for assessment and determination of the need for corrective action, or for the preparation of revised plans. While these plans can be either broad, strategic outlines of the company's future or specific and detailed schedules of the inputs and outputs associated with independent programs, most business plans are periodic plans — that is, they refer to company operations for a specified period of time. It is these periodic plans that are summarized in a series of projected financial statements, or budgets (Shillinglaw 2004).

The two principal budget statements are the profit plan and the cash forecast. The profit plan is an estimated income statement for the budget period. It summarizes the planned level of selling effort (shown as selling expense) and the results of that effort (shown as sales revenue and the accompanying cost of goods sold). Separate profit plans are ordinarily prepared for each major segment of the company's operations, and the details underlying the profit plan are contained in departmental sales and cost budgets, each part identified with the executive or group responsible for carrying it out. In addition, a number of businesses also prepare alternative budgets for operating volumes other than the volume anticipated for the period. These contingency sets of alternative budgets are known as flexible budgets. According to Shillinglaw, the practice of flexible budgeting has been adopted widely by factory management to facilitate evaluation of cost performance at different volume levels and has also been extended to other elements of the profit plan.

The second major component of the annual budgetary plan — the cash forecast or cash budget — summarizes the anticipated effects on cash of all the company's activities. Other elements of the budgetary plan, besides the profit plan and the cash forecast, include capital expenditure budgets, personnel budgets, production budgets, and budgeted balance sheets. All of these elements can help management make better decisions on how to allocate scarce resources and provide a benchmark against which to measure subsequent performance.

The budget process was developed to allow decision-makers to make more informed choices about how they allocate resources that are, by definition, scarce. However, John K. Mikesell (2000) points out that there are some fundamental obstacles and challenges facing the budgetary process for all organizations today. According to Lindblom, there are two general approaches that have always been used by policymakers to arrive at budgetary decisions. The first, referred to as the "rational-comprehensive (root) method," involves listing all related values in order of importance, then rating all possible policy outcomes as more or less efficient in attaining the maximum of these values (Lindblom 1959, p. 198). Another step in this approach involves comparing existing policies to identify any theory available that generalizes about classes of policies, in order to understand the potential advantages of one approach over another. However, Lindblom stresses that this method is almost never used because of its problematic and time-consuming nature: using this framework properly would require an investigation into how everyone affected by such a policy views the underlying values, and an arbitrary decision concerning the relative worth of each identified value.

The second approach is referred to as the "successive limited comparison" method. Using this method, Lindblom says, the budget-maker would "set as his principal objective, either explicitly or without conscious thought, a relatively simple goal"; further, this objective might be complicated by only a few other goals (Lindblom 1959, p. 198). A second step would be to outline the relatively few alternatives that occur to the budget-maker. Based on past experiences and controversies with other policies, the budget-maker would then intuit the most promising alternative from the list. "The final selection would combine into one choice among values and the choice among instruments for reaching values" (Lindblom 1959, p. 198). Lindblom points out that in the root method, "the inevitable exclusion of factors is accidental, unsystematic, and not defensible by any argument so far developed, while in the branch method, the exclusions are deliberate, systematic, and defensible. Ideally, of course, the root method does not exclude; in practice it must" (Lindblom 1959, p. 205). This exclusion of one priority over another is a difficult endeavor, but planning is a management responsibility rather than an accounting function.

Conclusion

The research showed that Catholic dioceses are classified as not-for-profit organizations because their income is derived from contributions and fund-raising efforts of their members. Consequently, a diocese provides a unique environment in which to contextualize the study of accounting and budgeting. The research also showed that the budgeting process is an integral part of almost any organization's financial management system. Therefore, improving the budget function in any organization will likely lead to an improved ability to accomplish the organization's goals. Churches in particular, though, have a moral responsibility to assure accountability for the scarce resources entrusted to them.