Hiring an Audit Firm

Hiring an audit firm is not easy but not hard either. The most important thing is to rely on references. Here are questions to ask a reference:

  • How well was the audit done?
  • How fast did they get out to do any field work?
  • How fast after the field work did they get the final report?
  • How many questions did they ask of staff and which staff?
  • What was their price?
  • Would you use them again?
  • Did they meet with management (with no staff present) after it was all done?
  • Did they ask staff if there are things staff wants included in the report?
  • Did they listen to staff’s answers about the way the staff does accounting versus the “perfect” method?
  • How much have they increased their price each year?

Here’s the process I use when searching for an auditor:

  1. Gather a bunch of names
  2. Get them to submit RFPs (you’ll have to give them your financials)
  3. Call references
  4. Invite 2-3 in for face-to-face interviews
  5. Select one
  6. Change auditors after 3-5 years

Lead On!

Steve

www.churchbestpractices.org – all kinds of FREE church manuals and sample documents
www.financeforchurches.org – 400 plus blogs on every church administration topic you can think of

Church Audits

There are several types of audits and here are the iterations

  • Who does the audit
    • Internal Audit – this is done in-house by the treasurer or an independent audit committee. Usually this is free (done by volunteers) and is not in-depth. It is a spot check on the accountant who’s doing the books. I’ve got a one-page sheet describing how this can be done.
    • Independent Audit – this is done by an outside CPA firm and it costs $4,000 to $15,000 depending on how many bank accounts you’ve got and how much they’ve got to hunt for info. The more they hunt, the more time they spend, the more they cost. Keep it SIMPLE!!!
  • Types of audit – usually done by CPA firm but could be done internally.  An outside auditor gives members more peace of mind. Audits done by church volunteers consume a LOT of time which volunteers could be doing something else and it makes donation info available to fellow members.
    • Financial Procedures Audit – this is to ensure that the people handling the money, deposits, checks, cash, bills, etc. are doing it the proper way. Auditors have a checklist of literally about 200 questions.
    • Financial Figures (the first two are not typically good enough for banks to give loans)
      • Review – someone looks at your internally-produced financial statements and states they look okay or not; the auditor will suggest improvements and changes as necessary.
      • Compilation – someone takes a pretty close look at your internally-produced financial statements and mostly replicates those financial statements on their letterhead; the auditor will suggest improvements and changes as necessary.
      • Full Blown Audit – someone spends several days at your place reviewing anything and everything they want and asking a ton of questions. At the end, they produce a set of financial statements that are accepted by banks and lenders and others. They will write up a management letter which tells the top management of the church what things need to be changed, improved, started, and/or stopped. It is thorough. It gives peace of mind to members and donors.

My recommendation:

  1. That the church treasurer or an independent audit committee of church members (not related to the Finance Committee) do an internal audit of the check register and/or general ledger every month
  2. That the church contract with an external/independent auditor to conduct a full-blown audit every other year and include a financial procedures audit. IF the audit firm can state that doing it once a year will be almost the same price as every other year, then do it every year.

The SECRET to a good audit: Have a filing system that is so simple, clean, & clear that anyone can find any document within one minute. I do that kind of system at all churches I consult with. At a recent audit, the auditors were on site for just one day and they had planned three days – that saved the church a LOT of money and got the auditors out quickly. 

Lead On!

Steve


www.churchbestpractices.org – all kinds of FREE church manuals and sample documents
www.financeforchurches.org – 400 plus blogs on every church administration topic you can think of

Monthly Financial Statements

My “Intro to Accounting” professor taught me some basic concepts which have guided me ever since. They are simple principles but vitally important to any and every organization.

 

  1. Always release a complete balance sheet and revenue & expense statement
    • These are the two basic financial statements. At a minimum these should always be released. There are a multitude of other financial reports but these are the minimums. These statements measure different things:
      • A balance sheet is a financial picture of the organization at a specific date. It shows all cash, debts, and restricted funds of a church.
      • A revenue & expense statement is shows how the organization is doing this fiscal year. It should have columns for the total annual budget; the monthly actual & budget figures; and the year-to-date actual & budget figures. Collectively these numbers indicate your current year’s financial status
  1. Never hide or not-release financial figures, even if they will elicit lots of questions
    • Never, ever, NEVER hide anything, period (.).
    • All numbers will come out. You need to be in control of bad AND good news. Hiding numbers only makes you look like you’re hiding things. That will always hurt you.
    • The numbers may look bad but the numbers are not about you but about the organization. Sharing everything allows you to keep your integrity. If the finance office has lost its integrity, it needs new staff.
  2. Release the data by the 15th of the subsequent month. To delay longer than that is to release “stale-data.”
    • There is no reason to delay releasing monthly financial data. Bank statements are available online so the bank reconciliation can even be done on the 1st of each month. There are going to be journal entries and maybe some backdated checks, but frankly, the financial office should be so update that closing each month is fast and routine.
    • Releasing financial data 30 days or later communicates that the finance office does not know what it is doing and/or that things in the financial area are unnecessarily complicated and needs help.

 

The bottom line, release financial data accurately and timely.

 

Lead On!

Steve

Designated Funds and UPMIFA (part 2)

Every church I’ve worked with has designated funds which are dormant. The long-standing rule of thumb was that to re-purpose the money in these funds was that each donor needed to be contacted to request permission to alter the use of their gifts. That is a good rule to use but in many cases, this is not practical or even possible. Fortunately, there is a legal alternative.  It is called UPMIFA: Uniform Prudent Management of Institutional Funds Act.

 

UPMIFA has been passed by almost every state legislature (there are a couple of holdouts) and it is virtually the same in each state. Look at your state’s legal code for the specific language – I’ll use the one from Virginia (where I live) for this post. In all instances the church must consult with a court or the attorney general. If the request is reasonable, they courts will agree to the church’s desires.

 

Below is the actual law from the Code of Virginia. Here are the salient points:

  1. Donors can change the purpose of their gift but it still must be used for a charitable purpose
  2. Judges and Attorneys General can change the purpose of a fund but it still must be used for a charitable purpose
  3. An institution can change the purpose of a fund by working with the Attorney General if the fund is less than $250,000
  4. An institution can change the purpose of a fund by notifying the Attorney General if the fund is less than $50,000, is over 20 years old, and it will be used for a similar purpose

 

  • 55-268.16. Release or modification of restrictions on management, investment, or purpose.
  1. If the donor consents in a record, an institution may release or modify, in whole or in part, a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund. A release or modification may not allow a fund to be used for a purpose other than a charitable purpose of the institution.
  2. The court, upon application of an institution, may modify a restriction contained in a gift instrument regarding the management or investment of an institutional fund if the restriction has become impracticable or wasteful, if it impairs the management or investment of the fund, or if, because of circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the fund. The institution shall notify the Attorney General of the application, and the Attorney General shall be given an opportunity to be heard. To the extent practicable, any modification shall be made in accordance with the donor’s probable intention.
  3. If a particular charitable purpose or restriction contained in a gift instrument on the use of an institutional fund becomes unlawful, impracticable, impossible to achieve, or wasteful, the court, upon application of an institution, may modify the purpose of the fund or the restriction on the use of the fund in a manner consistent with the charitable purposes expressed in the gift instrument. The institution shall notify the Attorney General of the application, and the Attorney General shall be given an opportunity to be heard.
  4. If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, without application to the court but with the consent of the Attorney General, may modify the purpose of the fund or the restriction on the use of the fund in a manner consistent with the charitable purposes expressed in the gift instrument if the fund subject to the restriction has a total value of less than $250,000.
  5. If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, 60 days after notification to the Attorney General, may release or modify the restriction, in whole or part, if:
    1. The institutional fund subject to the restriction has a total value of less than $50,000;
    2. More than 20 years have elapsed since the fund was established; and
    3. The institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument.

 

Lead On!

Steve

Designated Funds and UPMIFA (part 1)

Churches are the beneficiaries of designated gifts – people who give to specific causes that touch their heart. This can be scholarships for students to go on mission trips or to college, to pay for children’s supplies and events, and scores of other ministries. Used wisely, designated funds can enhance a church’s mission by adding extra dollars to a church’s budget.

 

Every designated fund must have a specific purpose (why it was established and what it is to be used for) and a sunset clause (a determination of when the fund will cease to exist). However, many churches have funds that don’t have either a purpose or a timeline.

 

I challenge each church to go through all of it designated funds and write down its purpose and when it will cease to exist. The good news is that most church accounting software has a section in the chart of accounts where a memo can be written about each fund. Use that memo tab to write in this info so that this knowledge can be passed from one person to another and not lost.

 

Then, use you designated funds to supplement your budget needs. Use them as much as you can and encourage people to give to them – over and above what they give to the church’s operating budget.

 

However, even doing all that, churches are going to have funds whose purpose ceased to exist long ago. There is legal help for that and I’ll describe it in the next post.

 

Lead On!

Steve

Chart of Accounts (part 4 of 4)

Large churches can have a complicated accounting structure but I strongly recommend a simple one. Fortunately all good accounting software allows for flexibility. The greatest area which needs flexibility is in expenses. For instance, some churches have large children’s departments with budgets for the different age levels (preschool and children) or even further sub-groupings (infant, preschool, early elementary, elementary, and middle school, and high school).

 

Some churches have even further needs for classification because they are multisite churches. For instance, they may want to track expenses across campuses for each classification (how much did we spend on craft supplies for our children across all campuses?) but also expenses within a campus (how much did we spend all the preschool program at campus X?).

 

This can be accomplished by adding a three digit department number at the front of the five digit accounting number. The accounting department can do an inquiry to get the financial info requested for each campus and/or budget line. Multisite accounting can be as simple as assigning a department number to a campus so that inquiries are made easier.

 

The critical path is to assign account and department/multisite numbers in a logical pattern which later makes it easy to retrieve data. If there isn’t a good pattern, then getting information will be difficult and that works against what you’re trying to accomplish: getting financial data to help you make better financial decisions.

 

Lead On!

Steve

Chart of Accounts (part 3 of 4)

A chart of accounts must start with the end in mind. The end is always the reports that you want to generate and use for decision-making. What data do you need and how should that info be presented? That determines the format of the chart of accounts. For example, all information about age-level expenses in a church should be in the same area of the CoA and not spread out everywhere; in fact, all the children’s and youth expenses should be grouped together and then sub-totaled which then totaled with other age-level expenses let the reader know how much was spent in that category.

 

The numbering system in a CoA is very logical. I recommend that accounts have no more than five (5) numbers but I’ve seen some as short as three numbers and as long as 16 digits. Five is a happy medium!

 

Here is the basic accounting numbering system which is used pretty much everywhere in the US (where AICPA controls the accounting system).

1XXXX – Cash

2XXXX – Payables, Restricted or Designated Funds

3XXXX – Retained Equity or Net Assets

4XXXX – Revenue & Receipts

5XXXX – Usually reserved for revenues related to special projects

6XXXX – Expenses

7XXXX – Expenses

8XXXX – Expenses

9XXXX – Usually reserved for expenses related to special projects

 

The first digit is the accounting classification. The rest of the digits can be used for sub-categories and other classifications. For instance:

61XXX Missions

65XXX Worship

68XXX Care & Fellowship

70XXX Discipleship-General

71XXX Preschool

72XXX Children

73XXX Youth

74XXX College

75XXX Young Families

76XXX Median Adults

78XXX Senior Adults

81XXX Office & Administration

85XXX Building & Grounds

88XXX Personnel

 

Finally, when the system is set up, the last digit is usually zero (0) so that additional lines can be added over time as needed without having to renumber the entire CoA.

 

Be familiar with the standard accounting numbering system so that when you see an account number, you’ll have an idea of what its accounting classification is. It will help you when you meet with the finance committee.

 

Larger churches have more complicated accounting structures. See part 3 for larger church department and multisite accounting.

 

Lead On!

Steve

Chart of Accounts (part 2 of 4)

In part one, I talked in generalities about financial statements. This post is description of each of the major areas.

 

Balance Sheet (no other name for this doc)

  • Assets
    • Cash on hand in bank and investment accounts
    • Petty cash
    • Sometimes it lists cash you’ll get within the next 12 months
  • Liabilities
    • Payables – usually payroll taxes and payroll deductions which will be sent to the proper recipient the next month. These should never sit for month than a month.
    • Debts – long and short term debts for mortgages and building loans. Each debt should be listed separately so you’ll know what it was for. This must be updated each month as you pay down your debt.
    • Temporarily restricted funds – these are typically restricted by purpose (what they are for). Usually these monies are spent within 12 months for a specific cause such as mission trips, children’s and worship events, etc. Sometimes funds are there for years but each one should have a “sunset clause.” (see my UPMIFA blog post regarding what to do with “old funds”)
    • Permanently restricted funds are restricted by time (how long they are set aside). Usually these are put into an endowment fund because they time and purpose is longer than 12 months.
  • Net Assets (also known as equity, retained equity, or owner’s equity)
    • This is the total cash balance of what the church has accrued since it was started. Often there are two figures for this: the current year-to-date earnings and the prior years’ earnings.

 

Profit & Loss Statement (also known as an Income Statement and Statement of Revenues & Expenses)

  • Revenues or Receipts
    • This section is the total income for the church. I strongly encourage that this section have only revenues from the main purposes of the church. Include in this category only tithes, offerings, and other undesignated budget gifts.
    • You can have a subsection for other receipts such as interest, building use receipts, etc. but this receipts are incidental revenues.
  • Expenses
    • These are budget expense lines grouped into categories with a similar purpose. Churches have several broad categories and the most common ones are:
      • Worship & Music
      • Care & Fellowship
      • Discipleship & Education
      • Missions & Outreach
      • Office Administration
      • Building & Grounds
      • Personnel

 

Lead On!

Steve