2040-07 CPA Audit Issues at a Church 2040-07- ZZeod

"EDITED ONLINER DIALOGS"


TOPIC Audits of Church Financial Records                                  ORIGINATED  November 2005

TOPICAL OVERVIEW:  Some 13 Onliner below share their views about the need that Churches have for a CPA Audit.  .    

FILE: 2040-07                                                                                                        UPTDMarch 09, 2012


Comments by  Jim Bramer - Retired CPA-Auditor

    Please notice the captured interaction on this "Dialog Topic: Audit of Church's financial records " topic by the Onliners below As a retired CPA-Auditor I will try to be as unbiased as possible and offer the following comments about an Audit's objectives and purposes within context of the Onliner comments below:

     A>   Regardless of size, a Ministry handles someone's else's money. Therefore it needs to be a good steward in (as much as possible) a transparent and up-front manner
     B>   An outside audit not only serves the Ministry itself but also validates the work of the staff who handles such resources.
     C>   A qualified outsider's perspective (be it via an Internal or External source) usually adds to a Ministry's fiscal veracity and credibility.
     D>   Most Ministries can usually improve their finance policies plus internal procedures and controls -- or (in general) improve their stewardship of cash and non-cash fiscal resources for their own well being. Audits should contribute to that end.
     E>   Presentation of financial data in a manner that is "according to hoyle - or per GAAP standards" allows reporting uniformity and makes possible realistic comparisons to like endeavors.
     F>   Loan providers, or applicable governing bodies, need assurance that the Ministry's fiscal data is valid and reliable.

    See the links below on our web site which provide more info on this overall topic:

CPA-Auditor Assignments - Types of  -- 0003   --
Other Such Matters follow: 
    Online Assurance  0056   Internal Auditors  0038  Volunteers  0057
 Evaluations:  0025  QB Assuror  0676   Fiscal Fitness  0129  Internal Controls  0039   Self Exam  0005  Grades  0128

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Dialog Topic: Audits of Church financial records

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An Onliner started this dialog with this comment:

    I was wondering if your church has a audit of their books. A Finance Committee members believes that we should be audited by a CPA-Auditing Firm. But our treasurer says it is a waste of money.

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Various Onliners had these responses:

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Onliner # 1

    A certain denomination with state offices stopped having an audit when they hired their last Chief Financial Officer (CFO), at his request. A couple of years after his being hired it was discovered that he had embezzled several hundred thousand dollars. Our Church in Chapel Hill, NC discovered a half million dollar embezzlement by their financial secretary over a period of about 3 years. Not only do I strongly recommend an annual audit, but to have it performed by a highly reputable firm.

    By the way, our 2004 audit cost $7,500. Next year's will cost $7,600. We get a hefty discount.  There are firms who will do this for churches. You just have to find them.

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Onliner # 2

    I question the value that many churches receive from an audit.
    First, very few CPA firms are proficient at church accounting, tax and audits. They view church audits as a courtesy and charge minimal fees or give hefty discounts. Then, they staff the audit with their most inexperienced staff, further reducing the audit's value. In essence, the church maybe receiving an audit report, but they are not receiving the scrutiny that an audit should entail.
    Second, the engagement letter specifically states that they are not looking for fraud and they are not responsible for catching it. I cannot remember the last time a CPA audit caught an embezzler.
    Finally, the church rarely does anything with the audit report and management letter once they receive them. The church should be proactively seeking better ways to conduct business and improve efficiency based on suggestions from the CPA firm.

    I am not advocating a lack of accountability. Accountability starts with hiring a CPA firm with extensive church expertise. Then they should only hire them to perform services that will bring value to the church.
    I believe that larger churches should use a combination of internal audit functions and CPA firm engagement (maybe including an audit). Smaller churches should hire a CPA firm to perform services that may be needed, such as a review of internal controls. I believe that the CPA service should be supplemented by members who are otherwise uninvolved in the financial processes of the church.

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Onliner # 3

    Another item to consider. We have an internal "financial review" conducted by three members of the church that are not on any boards or committees. One is a CPA, the other an internal auditor for General Motors, and the third a professional procedures guy.  The CPA can not understand why we do not depreciate any of our assets. He states that with out an asset base and depreciation, we could not get an "Audit" completed in accordance with FASB. FASB requires a deprecation schedule. How many of you are depreciating assets and what is your determining factor in doing that?
    Another issue is the cost of an audit. We have had quotes of up to $30,000. Other churches in our area have been dropped by their auditing firm because the firm was not making any money off these audits.
    Tough issue facing us. The alternative of no audit is understandable by churches because they think everyone handling their money is a "good Christian" I hope they do not learn the hard way.
    At least do a good Financial Review by people in your church that understands what they are doing.

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Onliner # 4

    For your Treasurer to say that an audit is a waste of money is an oxymoron. If anyone should understand the value of an audit it should be the Treasurer. My guess this person is a Treasurer in name only.  It is my understanding that probably 90% of churches in American do not have an annual audit. Of course, there are many types of audits, but most churches have none, zero, zip, nada. It is a sad commentary on the state of the Church in America. I plan to write a paper on this most important subject. I hope to have it completed right after the first of the year.
    In the church I attend we have not had an audit in several years. The last one was only a "Balance Sheet confirmation". In some of the other churches I work with have never had an audit done, (I'm trying to change that). One Church that I work for just completed their fist audit in over 30 years.  It was done by an internal audit committee and followed the procedures and process and guidelines recommended by their denomination. (Excellent by the way!)
    Someone was telling me recently that the State of Texas is working on some bills now that if passed will require that every non-profit (in Texas), will be required by law to have an annual CPA audit. Churches may be exempted, but perhaps not. There may be exemptions depending on the total income. Right now it is being considered somewhere between $20,000 and $100,000. The point is simply, churches had better get on the bandwagon now and not wait for it to be mandatory.

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Onliner # 5

    We are a Church in Pennsylvania with approximately 300 attendees. Our budget is $500,000. We have an annual audit performed by a CPA firm, however we wait until after tax season is over and pay a good deal less than we would if we wanted it done at the beginning of the year.

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Onliner # 6

    Another thing you can do to ease into the cost of a full audit is to have an Administrative Audit done, where they audit your procedures, the checks and balances in place, etc. It is usually not nearly as costly as a full-blown audit, but would bring up any problem areas that might need to be looked at more thoroughly.
    It's not the best answer, but at least it's a start in the right direction.

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Onliner # 7

    We have had an audit each year for the last nine years that was not always the case. It became clear to the church in looking to borrow from local financial institution that high quality financial statements that reflected the financial character of the church was important. Even more so it was important to the membership in that it demonstrated a commitment to excellence in stewardship.
    The audits also have been helpful in adjusting procedures to insure greater accountability within our accounting department and our overall handling of funds. They are worth the investment.

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Onliner # 8

    Our church has a million budget, and we don't do a full audit, we do what's called an "Agreed Upon Procedures - AUP" assignment. Virtually what they do is audit the cash account only. It costs about 1/3 of a full audit. I came from a larger church where we did a full audit. The size of the church should determine the depth of the review. I am the treasurer of my home church, and it concerns me to hear of someone who doesn't want any review.

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Onliner # 9

    Our denomination's regulations and Business Manual requires that any church with over $500,000 annual income have a full audit annually. An internal review may suffice for any income/revenue amount less than $500,000.

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Onliner # 10

    As a Church Business Administrator, the biggest sigh of relief I have all year long is hearing the auditor tell the Finance Committee, "We have a clean audit report". Nothing like peace of mind.

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Onliner # 11

    Our denomination requires a Church to have an annual audit. You can find a "Local Church Audit Guide" online at www.gcfa.org/FinalLCAG.pdf . Even if you don't want to pay for a full professional audit, having an accountant do an annual review of the books is fundamental to sound accounting practices.

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Onliner # 12

    I am involved in the business of making loans to Churches and I would like to weigh in on the audit debate from my perspective.

1. Having an audit will save your church significant money in the long-run should you ever need to borrow money. Guaranteed. When applying for a major building loan, line of credit or significant lease financing, the loan officer will take your application much more seriously if you can provide audited statements versus internally generated statements, or even CPA compilations. Sending a loan officer audited statements screams "legitimacy" and your application goes to the top of the pile and will get the best initial terms. You might spend $8k a year on your audit, and never see that it saved you $250,000 in interest cost on your loan terms. But it does.

2. Does an audit prevent fraud? No. That is true in the same way that a deadbolt lock on your front door will not stop the professional thief. But that deadbolt keeps your neighbors honest. In that same way, having a regular church audit does tend to keep the honest people honest.

3. If there is ever fraud, your Church's management and leadership team suddenly are not 100% to blame for the problem. You at least have an outside entity (the CPA firm) that is on the line as well. A church's reputation can be severely ruined if there is ever mismanagement or fraud. Having an audit firm to rely back on at least helps somewhat to mitigate the reputational risk. If I'm the treasurer of a large church that faces an embezzlement issue, I'd rather say that "The auditors and I missed it" than "I missed it"

4. A good auditor will tend to footnote "litigation issues" and "contingent liabilities" If I am a Church elder or deacon, I want to make sure that I am made aware of any potential litigation or contingent liabilities that my Church has. Internal financial statements do not do that. Auditors that do not do their job effectively will miss these things, but good auditors will usually have good footnotes.

    Does this mean every Church should have an audit? No, there are many smaller churches that can get by without it, or with lesser accounting services. But, if you are on a significant growth track, or have a fairly large tithe and offering base, you should at least seriously consider it.

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More from Onliner # 2 above

    I agree with you regarding churches that have significant debt. They should always be audited because it will reduce their interest rate. And many bankers blindly assume that the audit is competently conducted. With an audit firm that does not have significant experience with church accounting and auditing, the audit is probably not worth the paper it is printed on. Most church audits that I see have serious deficiencies. Major CPA firms have been sued for audit failures in auditing nonprofits and churches. Though they had a great name and reputation, they did not execute the audit even to their internal standards. Most stated that nonprofit and church audits were the lowest risk audits that they conducted. As a result, they failed to prevent a tragedy. A competently conducted audit comforts me as the treasurer, but not as much as a study of internal controls that tell me that the information I am receiving is accurate and complies with the church's policies and procedures.
    I always ask the question, "Why do you want an audit?" You list many legitimate reasons for securing an audit. But most of the time the reason is, "Everyone says we need one." In that circumstance,  I am hesitant to use that as justification for an audit.
    I question the value that many churches receive from an audit. First, very few CPA firms are proficient at church accounting, tax and audits. They view church audits as a courtesy and charge minimal fees or give hefty discounts. Then, they staff the audit with their most inexperienced staff,  further reducing the audit's value. In essence, the church maybe receiving an audit report, but they are not receiving the scrutiny that an audit should entail. Second, the engagement letter specifically states that they are not looking for fraud and they are not responsible for catching itI cannot remember the last time a CPA audit caught an embezzler in one of my church clients. Finally,  the church rarely does anything with the audit report and management letter once they receive them.
    The church should be proactively seeking better ways to conduct business and improve efficiency based on suggestions from the CPA firm.
    I am not advocating a lack of accountability. Accountability starts with hiring a CPA firm with extensive church expertise. Then they should only hire them to perform services that will bring value to the church. I believe that larger churches should use a combination of internal audit functions and CPA  firm engagement (maybe including an audit). Smaller churches should hire a CPA firm to perform services that may be needed, such as a review of internal controls. I believe that the CPA service should be supplemented by members who are otherwise uninvolved in the financial processes of the church.

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Still more from Onliner # 2 above

    In my opinion, you should have a CPA firm audit if your annual budget exceeds $2 million.  If your annual budget is less than $500,000, you should not have a CPA firm audit unless special circumstances exist, such as investigating an embezzlement.  Between $500,000 and $2 million you need to decide whether your church will receive value from an audit.

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          As most of you know, at  www.bcidot.org   dialog by email with Onliners regarding Ministry Finance (MinFin) matters.  Above are what we call "Edited Onliner Dialogs", or edited versions of actual dialogs with some of you;  but we have honored your privacy and not used your name or that of your Ministry.  Our purpose is to make topical MinFin information available to any interested  Ministry Finance Team  so we all can learn from these perspectives.   Thanx - Jim Bramer, Retired Auditor-CPA  - Proverbs  9:10

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