Church audits: know the 4 V’sbudgeting, Business Activity, CURRENT ISSUE, FINANCE, Financial Services, IRS Compliance, Latest News, LEADERSHIP, LEGAL Wednesday, May 13th, 2015
By Tammy Bunting
Depending on your role at the church, you’ll hear the word “audit” and come to one of two conclusions:
If you’re the finance manager, you understand the need for the substantiation of the integrity of the data — even though an audit can add to your already busy workload.
If you’re the pastor, it comes down to one word: “Why?” The financials are written in what appears to be a foreign language, and they don’t seem to help as you try to make good, mission-critical decisions, anyway.
So, why pay a CPA to audit the church financials?
At this point, I run the risk of losing your attention. Seriously, who wants to talk about audits? The definition alone — “conducting an official financial examination” — sounds like a doctor’s diagnosis.
But, bear with me.
In the interest of getting straight to the takeaways, let me introduce a memory aid. Instead of the ABC’s, let’s focus on the 4 V’s of church audits:
When trying to determine the importance of the things we do, it comes down to a question of value. What’s the value added in having an audit? What will be our return on this investment? Maybe we’ve been asked to provide audited statements to our bank, but it’s important that we understand the true value of having the audit completed. For example:
• An audit provides assurance that funds received and expended are in accordance with the donor’s restrictions or the church’s mission.
• It provides a level of assurance to lenders that there aren’t any substantial misstatements of funds.
• It can protect the persons handling the funds from any accusations of misappropriation or fraud.
A common thread is assurance and protection — the value, defined. Matthew 25:21: Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things.
Preparing for an audit is a little like doing laundry when you have kids: As soon as everything is folded and put away, you find another mile-high pile of dirty clothes. And you certainly can’t leave all the dirty clothes until the last minute or someone will walk out of the house with damp jeans.
So, how do we prepare for the audit all year long? After all — like that laundry — it’s easier to keep things organized than to get them organized.
To that end, here are five things to keep current (and accurate) year-round:
1) Create your internal controls. Document and follow them … every time!
2) Reconcile donated funds. Prove that all funds are being used as stipulated by the donors.
3) Segregate duties. Make sure more than one person is involved in the handling of money.
4) Set accounting controls. Make sure your system is user-friendly and accessible. Banks are reconciled every month!
5) Have adequate insurance coverage.
When the auditors come knocking at your door, don’t panic. You’re ready for them.
Their job is to verify what you’ve been preparing all year. Before the formal audit begins, the audit firm will send out confirmation forms to banks and insurance companies. The confirmations provide them with an independent verification of bank balances and the coverage levels of your insurance policies.
Once the confirmations are delivered to the audit firm from the institutions, the auditors will be ready to get started. The purpose is to be sure that all monies have been distributed and allocated accurately and as approved.
To that end, here’s a quick list of key areas they will review and verify.
• Cash and cash equivalents
• Gifts, both restricted and unrestricted
• Disbursements and any outstanding payables
• Fixed assets
Ultimately, the goal of the audit is so that the auditor can express an opinion on two primary aspects: 1) that the financial statements are fairly presented, and 2) that they are in accordance with generally accepted accounting principles (GAAP).
A common misconception is that auditors prepare and produce the financial statements, and we (the “auditees”) get the job of decoding the results. In actuality, the only part of the audited financials that belong to the auditors is the “opinion” — the rest is yours.
The Statement of Activities must be presented in a way that speaks to the mission of the church, and not just as a collection of numbers. Make sure your church’s summary of the activities is presented in such a way that it tells the reader you’re fulfilling your mission and growing the church.
An audit brings assurance to the data integrity; but the value-add is evident in the summation of the church’s activities, plus the validation that the church’s visionary goals are being accomplished.
Tammy Bunting is the Director of Not-for-Profit Services at AcctTwo, which provides cloud-based financial management software and outsourced accounting for churches. AcctTwo’s solutions help churches automate processes, increase accuracy, and provide a complete financial picture.