Checking The Church Checkbook

By Diccy Thurman

Like other not-for-profit organizations, your church has a fiduciary responsibility to ensure that your financial records are accurate and meet legal requirements. Often by-laws require the services of an outside professional accountant to verify the accuracy of the church books.

Problem: A full audit can be too expensive for some churches.

Solution: Accountants offer three levels of service related to a church’s financial statements: compilations, reviews, and audits.

Basic Compilations

Considered by many the minimum in bookkeeping services, a compilation of financial statements can provide the basic structure for a church’s accounting system. Literally, a compilation means that the accountant has compiled-pulled together-financial statements using information provided by the church, without audit or other verification.

Worth Considering: I frequently recommend that churches have acompilation of their records completed monthly. Advantages:

* An accounting service will see that financial statements are prepared on a regular basis.

* A good accountant usually will either do for the client, or prompt he client to do, the basic tasks necessary for good bookkeeping. Examples: Reconciling bank accounts or accounting for and recording all transactions in a general ledger.

* A compilation involves an external third party in the financial accounting. To maintain objectivity, many churches prefer an accountant who is neither a church member nor has any outside relationship with church financial leaders.

* A compilation is often the only accounting some smaller organizations have performed, so it offers at least minimal assurances that the books are in order. Also: If the church employs further accounting services, such as a review or an audit, the accountant will assume that financial statements are already compiled or internally prepared.

More Rigorous Reviews

For a review, an accountant spends more time analyzing financial data and questioning people about specific transactions. Result: Because the accountant accepts a higher level of responsibility in a review, a church has greater assurance that its financial statements are in order.

Worth considering: A review can cost nearly as much as an audit, and reviewed financial statements generally are not accepted by organizations that require an audit. Reviewed financial statements are more common for large public entities than for nonprofit organizations.

Audits for Assurance

An audit of financial statements is the ultimate in outside, independent accounting services. A financial statement audit is prepared on a particular basis of accounting. For nonprofit organizations, it is usually on a cash basis or an accrual basis. Challenge: For a church’s first accrual-basis audit, establishing appropriate amounts for assets such as land, buildings, and equipment can be difficult.

Process: Auditors selectively test transactions, such as cash receipts and disbursements, and often request written confirmations from banks, lenders, donors, and others as needed. Key elements: Time and cost are usually the most surprising factors in an audit. An audit typically takes from a minimum of a few weeks for a small audit to several months for a more complicated audit. Also: A first-time audit usually takes longer than a recurring audit.

Note: As with a review, compiled or internally prepared financial statements are necessary beforehand. Important: An auditor must be independent both in fact and appearance. At the beginning the auditor should document in written form the expectations for the audit in an engagement letter. The process is concluded with an opinion on the financial statements, which may range from “unqualified” (meaning the auditors believe the financial statements present the organizations financial position fairly) to “adverse” (some serious deficiency needs to be corrected in the financial statements).

The Appropriate Service

How can a church know which level of service best fits its needs? While there are numerous factors to consider, here are several I encounter in advising organizations.

* Need. A compilation or review may be adequate in certain situations, but in others only an audit will do. An audit may be needed if:

– You intend to apply for a bank loan, and the bank requires debtors to provide periodic audited financial statements.

– Your church is a member of a governing body that requires an annual audit.

– Your church receives federal funds for activities, such as a daycare center.

Tip: A good accountant usually will ask you why you want or need an audit, in order to better assist you in choosing an appropriate level of service.

* Cost. The size of the church, the number of transactions, and the expertise of in-house staff affect fees.

Also: The region of the country and the competitiveness of the accountants in the area will greatly determine your cost.

– Compilations run as low as $150 to $200 per month for a small organization to several times that for a larger organization. Note: The accounting profession is generally efficient in providing services. Nonprofit organizations may discover that compilation services compare favorably with the cost of a full-time, in-house accountant and often provide additional professional competence difficult to obtain in-house.

– Reviews fall between the costs of a compilation and an audit.

– Audits begin at several thousand dollars and increase depending on such factors as the size of the organization, the condition of its records, and previous accounting services.

Note: Beware of unusually low fees and be sure you are dealing with a certified public accountant (C.P.A.).

* Confidence. Often organizations authorize an audit when there is a change in financial officers, such as an incoming board, pastor, or treasurer. Additionally, factors inherent in the organization may make a periodic external examination of the records prudent. Examples: When one person has a lot of control without much oversight, when there is high turnover of personnel, or when finances or operating expenses differ significantly from budget or expectation.

Advice: Build an internal-control system that reduces the opportunity for abuse. Good accounting services in help identify areas that need greater oversight.

Maintain Good Relations

A volunteer may be able to keep or verify your books, or you may require professional services. Key: Whatever you decide is the appropriate level of accounting service for your church, you’ll get the most from your accountant by asking questions and making him or her a part of your church’s financial team.

(The above information was published by YOUR CHURCH, December 1993)

Christian Information Network