For most of us the term “audit” calls to mind the potential of being notified by the IRS that our income tax returns will be scrutinized by their examiners. But the term simply means to examine or evaluate. Originally it meant to listen (from auditory).
Occasionally, someone qualified to pass judgment would audit a university professor’s classes.
At length the term came to be applied more generally to any process of examining and evaluating, as when a building is audited to determine whether it meets the needs of its occupants, or when an energy audit is conducted to evaluate how efficient it is. Eventually, audit referred rather specifically to financial accounting procedures.
While most churches acknowledge that an annual audit is a good idea, and a few even have financial policies requiring one, it is easy to put off because of the cost and the hassle of preparing for it.
Still, if your church ignores the need to examine the finances and evaluate the processes used by those who handle money, you are placing your church at risk.
An annual audit will assure church members that the leadership takes good stewardship very seriously. People don’t usually give simply because they know that money is being handled honestly. But if they suspect it isn’t, giving will dry up in a heartbeat.
The best way to conduct an audit is to hire a person or firm from outside the church to do an independent assessment according to generally accepted accounting principles. While this person does not have to be a certified public accountant, he or she does need to have expertise enough to render a credible opinion about the finances. This is often referred to as a “full audit.”
Upon completing their work, the auditor will provide a statement something like: “In our opinion, the financial statements present fairly …. the financial position of the entity as of year-end, and the results of its operations and its cash flows .…”
Alternatives to a full audit
Sometimes the expense of a full audit is difficult for a church to manage, so it is good to know that it has other options. An alternative to an outside examiner going over the books is to conduct an internal audit. In this case, some person or group within the church examines the financial transactions and procedures. As with the outside auditor, the internal auditors need to be expert enough to know what they are looking for. They also need to be unrelated to those responsible for managing and handling the finances.
Writing for a Nazarene publication, CPA Dan Busby stated, “If the committee takes its task seriously, the result may be significant improvements in internal control and accounting procedures. Too often, the internal audit committee only conducts a cursory review, commends the treasurer for a job well done, and provides the church with a false sense of security.”
Usually when internal audits are used they are augmented at regular intervals—every third year, for example—by full outside audits.
Two other alternatives to a full audit are recognized. The first is called a financial review. The review is not as comprehensive as the audit and for that reason the auditors usually provide a statement after their findings such as, “Based on our review, we are not aware of any material modifications that should be made to the financial statements .…”
The other alternative is called “agreed upon procedures” in which only specific transactions are examined. For example, a church may opt to examine only accounts paid. Because the scope is limited the cost is usually much less than a full audit. The down side, of course, is that only the specific, contracted transactions are examined.
Why should your church have an audit?
In a statement to their churches, the trustees of the western presbytery of New York provided the following rationale:
“An annual audit is the best way we know of:
“• To protect the persons the local church elects to offices of financial responsibility from unwarranted charges of careless or improper handling of funds;
“• To build the trust and confidence of the financial supporters of the church in the way their money is being accounted for (trust and confidence lead to improved patterns of financial support);
“• To set habits of fiscal responsibility to assure that when there is turnover in personnel there will be continuity in accountability and nothing will fall through the cracks;
“• To assure that gifts made to the church with special conditions attached are consistently administered in accordance with the donors' instructions, and thus let donors know their gifts are used as intended;
“• To provide checks and balances for sums received and expended.”
They concluded, “Conducting an audit is not a symbol of distrust. It is a mark of responsibility. It is good stewardship demonstrated for all to see. It is a message to local church donors that you care about their gifts.”
Conducting an annual examination of the financial operations of your church is admittedly time consuming for those directly involved, and it is undeniably a hassle to get everything ready for the examiners. It can also be expensive. But the rewards are that your church and those who handle your church’s finances will be above suspicion and church members can give with confidence that their offerings are being used at intended.
Jim White is executive editor at the Religious Herald. ([email protected])
Key auditing concepts
• Good accounting records and good stewardship go hand in hand.
• Your church is the trustee of the money it receives—handle it carefully.
• Tailor meaningful financial statements for your church.
• Prepare timely financial reports covering all of your funds—not just the operating fund.
• An annual examination—of some kind—is a must.
Caution! Never sign a blank check.
Reflect! Account for all check numbers—even voids.
Recall! Keep accurate records and provide accurate receipts.
Remember! Neither the pastor nor the church treasurer should count the offering.
Idea! Protect your staff and volunteers from suspicion and accusation by adhering to sound financial procedures for those who handle money.