Does Your Church Need a Financial Check-up?
By Mark Helland

Mark Helland, CPA is a partner with the public accounting firm of Elliott, Dozier and Helland, PC which is located in Tulsa, Oklahoma. Mark specializes in audit and tax related issues for church and ministry clients across the United States. Mark’s firm works with hundreds of churches and ministries across the U.S. and is available for assistance on this issue. To contact Mark on this topic or for assistance on any other tax, accounting or church audit and compliance need, Mark can be contacted via email at [email protected] or by phone at (888) 893-1259 or (918) 488-0880.

Our church needs an audit! That is the phone call that I have received so many times from pastors and churches across the country during my career. In most instances, this call is the result of one of the following events or “triggers”:

1. the church is trying to obtain financing or already has outside bank financing and the bank is requiring some level of financial review,
2. fraud has occurred in the church and/or
3. the church congregation is questioning the use of church funds, etc.

While some churches have made it a policy to have some level of financial review or “check-up” on an annual basis, the three situations noted above seem to prompt the need for help from an outside CPA firm in many cases. What I seem to find in many cases is that pastors, church business administrators and church board members many times don’t fully understand what “an audit” entails or if this is really the level of service that they even need. This article will hopefully help give pastors, churches and ministries a quick synopsis of the menu of financial “check-ups” that are available and the level of service offered for each one.

A comprehensive set of financial statements with footnotes is perhaps the best way to evaluate a church or ministry’s performance and, from a lender’s perspective, to determine its ability to repay debt. Generally speaking, there are two types of financial statements – audited and un-audited. Audited financial statements are those statements that have been examined by an independent Certified Public Accountant (CPA) firm, who has expressed their professional opinion of the organization. The CPA firm is bound by generally accepted auditing standards and "General Accepted Accounting Principles" (“GAAP”). GAAP is essentially a very complex set of rules as to how financial information should be reported and how financial transactions should be recorded. Un-audited financial statements contain no such professional opinion of the organization’s compliance with GAAP and to some degree this limits their usefulness for a lender to evaluate the financial health of the organization. Following is a more comprehensive explanation of the three levels of service.

Financial Statement Audits
Audited financial statements provide the highest degree of assurance to financial statement users, but this is also the most expense alternative to a church or ministry. In an audit, an independent CPA firm uses various techniques to verify the accuracy of the information in the financial statements, and then expresses an opinion on the fairness of the financial statements. The CPA firm provides written assurance that financial reports are ‘fairly presented in conformity with generally accepted accounting principles (GAAP). Audit standards also require that the internal controls of the organization be evaluated in order to assess control risks present within the organization. For many churches, internal controls are most likely insufficient, so this is a critical factor of an audit that is not present for a review or a compilation. The final product of an audit is a set of financial statements with full footnotes that explain many key aspects of the financial statements and the nature of the organization and its policies. Additionally, a report is issued to management which details any internal control deficiencies that were noted during the audit and corrective measures that should be implemented.

Financial Statement Reviews
Reviewed financial statements provide a much lower degree of assurance as opposed to audited financial statements, albeit at a much lower cost. During a review, the CPA firm makes inquiries and performs analytical procedures, which allows the CPA firm to express limited assurance that it is not aware of any material changes that should be made to the financial statements for them to be in accordance with generally accepted accounting policies. For example, during a review a CPA firm would likely ask management how inventory quantities are determined, as compared to audit procedures for inventory which would include observation of the taking of physical inventory. Additionally, there is no formal consideration of internal controls and the documentation of weaknesses as noted in an audit. While a review does not provide the same degree of assurance as an audit, the form of the financial statements and footnotes issued are essentially the same as those issued in an audit and some financial statement users may find it to be an acceptable alternative.

Financial Statement Compilations
Compiled financial statements provide no assurance whatsoever to financial statement users, and generally a compilation does not include the statement of cash flows or footnotes to the financial statements. In a compilation, the role of the CPA firm is to simply assist management in preparing the financial statements. The CPA firm is not obliged to verify the information that is presented, nor is it obliged to offer any level of assurance as to whether the financial statements meet any of the professional standards. In a compilation, the CPA firm only agrees to present the financial statements in the appropriate format and make certain that the data presented is in the correct format and is clerically accurate. Compilations are obviously the cheapest alternative of the three financial statement presentation alternatives.

Agreed Upon Procedures Engagements
Agreed upon procedures engagements do not provide a set of financial statements or footnotes and basically are a specialized engagement whereby an organization can enlist the help of a CPA firm to investigate and report on a specified issue. For example, a church might ask a CPA firm to see whether or not their church’s internal controls over its offering count procedures are adequate or whether or not the church is in compliance with major IRS requirements for non-profit organizations. In other words, all that the CPA firm reports on in this type of engagement is the pre-defined issue(s) that is of concern to the organization. We sometimes refer to more broad scope engagements as a “church compliance” engagement where many issues can be addressed, without any financial statements being issued.

Ultimately, it is up to each church or ministry to determine what is the best fit to them in terms of cost and to define who the financial statement users are and what their requirements or needs might be. For smaller churches and ministries, we generally recommend either a compilation or preferably a review. The cost of an audit can be significant and if the church’s lender is amenable to compilation or review this can be the more cost effective way to go. While the church or ministry would forgo the additional assurance and consideration of internal controls that an audit affords, it may be possible to specifically target areas of concern by pairing a lower cost agreed upon procedures engagement with the compilation or review. For example, if controls over a specific church function are a concern, the church could enlist an independent CPA firm to specifically address these controls rather than considering ALL controls of the organization.

For larger churches or ministries, we strongly recommend an audit or at a minimum, a review engagement. While the definition of “large” is somewhat vague and hard to pinpoint, I would consider any church with over five hundred members to be relatively large. For this type of church or ministry, it is important to stay ahead of the curve and make sure that financial statements are accurate. I have seen many cases where the church had a sudden need for financing and the church had never had the financial statements examined by an external CPA firm. In the majority of these cases, there were significant problems that had gone unnoticed for years and the cost of performing the engagement was much higher and/or the lender was “surprised” or not impressed with the financial health of the organization. Additionally, it is very important for the church congregation to have confidence that the church’s financial statements are strong and that the church is operating as a good steward of their contributions. An outside audit or review performed by a CPA firm can provide this level of assurance and confidence. Given the present state of the economy, we would predict that information requirements will only continue to increase in future years and that churches and ministries should prepare themselves for these new realities. Our firm provides audit, review, compilation and agreed upon procedures engagement services to dozens of churches and ministries across the United States and we feel count ourselves as blessed to serve you and help you accomplish your goals!

 

This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is shared with the understanding that neither the author nor Tony Cooke Ministries is engaged in rendering legal, accounting, psychological, medical or other professional services. Laws and regulations are continually changing, and can vary according to location and time. No representation is made that the information herein is applicable for all locations and times. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

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