July 2009
Financial Planning

Audits: A necessity, not an option

These are real headlines that cause lay and clergy leaders to worry in trying times when pressure on church funding increases:

“Contracted support person over bills church”
“Church financial records in disarray” 
“National treasurer admits to misuse of funds”

Especially in these difficult economic times, when every penny counts, an effective church audit is a necessity and no longer an option. Canon law also requires (Canon I.7.1 (f)) that all congregations must have, annually, an external audit performed by outside CPAs or an alternative group approved by their dioceses.

Many years ago a senior IBM executive said his concept of effective financial management information for him was to have “the least amount of information which assured him that he is in control of his resources.” Likewise, church leadership needs to be able to sleep at night and to be able to focus on living the Gospel, sure of the accuracy and safety of church finances, without such control requiring inordinate expense.

Audits must provide verification and trans- parency. Key functions of a church audit are:
  • To verify the accuracy of accounting and the treasurer’s reporting;
  • To assure that funds are safe and allocated correctly to specific uses if designated;
  • To document and enforce financial policies, procedures and record keeping, and;
  • To verify the control of the flow of cash receipts and cash payments.
Internal audits, helpful for making sure all monies are being spent appropriately, are performed by a small team of experienced community members. The team should not include the treasurer, business manager, or administrator, but will need access to all. The objective is to use volunteer expertise to perform the basic audit. Numerous tools and templates are available on the web to facilitate producing standard written documentation on the findings. Frequently, cost effective improvements in procedures and controls are revealed. In today’s economy more talent may be available to tap than in more stable times. A challenge in this approach is to obtain year to year consistency. I once asked a team of MBA candidates from the University of Chicago to design and develop a pioneer online church accounting system only to re- alize that the resulting system could only be operated by those MBA’s.

Operational financial system changes are not beneficial unless they can be implemented within your church environment. Increasingly volunteers seem to be interested in defined tasks over a relative short time period. An internal audit may be just the right opportunity for those with appropriate skills and experience to demonstrate needed stewardship. 

External audits are performed by firms of CPA’s. These firms, large or small perform a structured examination of your church financial operations and produce a “qualified” or “unqualified” audit Letter. Unqualified audits are invaluable in pursuing most financial grants. They can be costly.

Utilizing firms experienced with church audits can reduce costs as they recognize the unique areas of church accounting and often are familiar with church accounting software packages. Do not hesitate to explore firm’s willingness to do pro bono or reduced charge nonprofit work. Many will. Always include in any negotiation a commitment of the experi- ence level of staff who will take part in the audit. Auditors in training, “green beaners,” are often assigned. Remember that they, like all audits, need to be managed. Many congregations are developing alternative methods to conduct audits, such as sharing teams, or qualified individuals, from small parishes with one another.

Internal or external audits should be seen as supportive and protective of the staff doing the day to day, month to month financial op- erations. The objective is not to “catch” people, but rather to allow them to sleep as well.

The former senior warden and investment committee chair of St. James Cathedral in Chicago, Illinois, Tom Patterson is also the former acting business manager and development manager at St. James and has served as the treasurer and audit committee chair for the Consortium of Endowed Parishes.
This article is part of the July 2009 Vestry Papers issue on Financial Planning