Episcopal Church Foundation Vital Practices - Vestry Papers - Finance and Administration

May 2014
Finance and Administration

Audits: Practicing Internal Controls

Martha Goodwill

This article is also available in Spanish here. Este artículo está disponible en español aquí.

On this day, the rector opened the mail.

For almost 30 years, St. Harriett’s had the same treasurer. He opened all the mail, wrote all the checks, and reconciled all the back accounts. He made sure bills were paid and even helped the church begin to grow an endowment. But on this day, the rector opened the mail and what he found eventually amounted to a huge, almost insurmountable, IRS debt. Payroll tax deposits were not made.

This was a very hard lesson to learn on internal controls. But, internal controls are the single most important area for an audit to cover. With small, mostly volunteer staffs, many of our churches rely on the same, small pool of parishioners to staff the church office year after year. In most cases, this proves to work well and cause no issues, but when there are issues, they can result in serious consequences.

What do we mean by internal controls? These four recommended actions are a good place to start:

Listening

Many times in audits, listening is as important as reviewing the flow of paper. Listening to the narrative of how Sunday collections are handled, for instance, can reveal that there is only one person counting the plate, recording the contributions in the parishioner records, and taking the money to the bank. This is an obvious example of internal control weakness, but adding just one or two additional parishioners to the job of handling the Sunday collections, can greatly safeguard not only the cash but also the accuracy of parishioner records. Likewise, with cash disbursements, what is the narrative for paying the bills?

Reading

If the audit procedures you are using allow for narration in your answers, then reading through the previous year’s audit and the accompanying suggestions made by the previous year’s auditor can reveal insight to help you with the current audit. If suggestions have not been followed, then find out why not. As the current year audit progresses, you may find an alternative solution to the suggestions posed in the previous year.

Another good source of insight is the vestry and other committee minutes. By reading these minutes you can see the flow of the year, what difficulties or blessings came upon the parish. The minutes can give you a good overall view before you dig into the details of the paperwork and can point toward areas that might need more review. If the vestry is reviewing the monthly financial statements, as they should be, then budget to actual variances will be explained in either the vestry or finance committee minutes. Knowing the reasons behind these variances can also highlight areas needing more attention.

Combining

Did you know that any separate entities, which derive their status from the church, should be included in the annual church audit? These would include entities such as the Episcopal Church Women, thrift shops, schools, parking lot rental, memorial funds, endowment funds, and all sorts of restricted funds. These entities often have their own checking accounts, the activity of which should be combined with the church on the year-end financial statements.

Sometimes a hidden source of support for the church may come from one of these entities. Analysis and understanding of the flow of funds can be a surprise to many church leaders. It is important to know if the church is supporting itself from its own pledge and plate or if it is relying too heavily on other sources of support. The opposite is also very important to know, is the church underwriting the activities of one of these other entities to the detriment of the church’s own health? In the end, it is important to see how all of the parts work together so that a clear picture of the financial health of all of the entities can be understood.

Follow through

Back to [the opening paragraph about] St. Harriett’s and their payroll dilemma. Better internal controls could have prevented such a catastrophe. But, if the auditors had followed the payroll transactions all the way through to the bank they could also have caught the fact that the payroll tax deposits had not been made. Payroll transactions can be complicated and often a very cursory look is given to this part of the audit. However, this area is where our churches have a very real tax liability. Filing the proper returns and making the proper tax deposits is imperative. The auditor should insist that the responsible staff person walk them through all the transactions, with whatever proof is necessary to assure that deposits have been made and returns have been filed.

The best way for a church to protect itself at a very reasonable price is to out-source its payroll processing to Episcopal Payroll Services. This way the burden of correct reporting and payment is removed from the small pool of employees and volunteers.

So, on this day, and on all the other days to follow, look for and implement good internal controls. Auditing is meant to give assurance that all the i’s are dotted and the t’s are crossed so that the church can get on with its missions and ministry in the world.

Martha Goodwill works as the Parish Administration Resource for the Diocese of Southwest Florida. In this position, she serves as a consultant to the 77 parishes in the diocese on all administrative issues.

Try This: At their fall 2013 Vestry University, the Episcopal Diocese of Newark offered a workshop, “I’m On the Vestry…What You Need to Know About Your Church’s Finances.” ECF Vital Practices recommends vestry members review the slides from this presentation, asking the questions:

Are you familiar with the topics presented?
Does your congregation follow these practices and recommendations?
Do you know or can you easily find the answers to the questions posed about your congregation’s finances?
Does your congregation have any red flag items? And if so, will you take steps to put the necessary red flag controls in place?

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