Finance Fridays: Audit Alternatives

An article by Bill O'Connell    No Comments

Every year around this time I tend to get inundated with friends in church leadership asking about how to go about having their financials audited.  I’ve asked Bill O’Connell from Wisdom Over Wealth to share a little bit about how churches can best handle the audit process.  Bill has over thirty years experience as a CPA, and has spent many of them helping churches wrestle through how to handle their finances.  Here is what Bill has to say about audits, and audit alternatives, for the church.   

At this time of year many church boards attempt to exercise their fiduciary responsibility and consider auditing the books.  Underneath it all, they desire to have an independent financial professional ‘take a look’ at the books and records and tell them if things are OK – and maybe offer some suggestions on how things could be done better.

The board then wrestles with the decision to engage a CPA to perform an audit.  The discussion usually results in one of four outcomes:

• Hire a local CPA and spend thousands of dollars to receive a report that only says that the financial statements are “fairly stated in accordance with Generally Accepted Accounting Principles” (GAAP).  This costs a lot of money, does not meet the felt need, and is usually received so late that everyone regards the report as a piece of history.
• Engaging a CPA for a “review” or “compilation”.  While many boards find the slightly reduced cost attractive, they quickly realize that these reports focus on the “audit work” the CPA did not perform, and the degree to which the financial statements conform to GAAP.  These reports don’t address the internal operations, which many boards find disappointing.
• Commissioning a volunteer “audit committee” that reviews the quality of supporting documentation for the payments that were made during the year.  This solution usually fails to meet the level of independence or professional care that the board would like to bring to their fiduciary responsibility.
• Choose to do nothing and simply live with the uncertainty.  This is generally the result of a board not being satisfied with the options that are readily available to them.

So, isn’t there something better?  A cost effective engagement with a CPA which  provides a comprehensive report that answers the questions that the board wants answered?

Yes.

Ask your CPA to perform an “Agreed Upon Procedures” engagement.

Agreed Upon Procedures: A cheaper – and better – way to “check the books”

An Agreed Upon Procedures engagement is defined mutually by the church and the CPA.  Rather than following rules made by the AICPA or the FASB, the CPA simply follows a work plan devised with the Church in advance.  The written report is an in-depth discussion of the work that was done and the resultant findings.  This format allows the independent professional:

• The freedom to “keep digging” into potential problems even when the item may be immaterial to a GAAP audit.
• The freedom to limit the scope of work when controls and tests indicate that no further work is needed.  This removes work requirements that must be performed in full GAAP audits – like corresponding in writing with the church legal counsel.
• The freedom to address areas where improvements may be made.

At Wisdom Over Wealth these work plans will likely include some – or sometimes all – of the following:

• Cash Controls and a review of bank reconciliations
• Separation of Duties
• Compensation and Employment Controls (including Pastoral housing allowance and 1099 contractors).
• Financial Reporting Controls
• Budgetary Controls
• Physical Controls of building access and computer files
• General Controls (Minutes, insurance, etc.)
• Other items of particular interest to the church.

Since the church defines the scope of work, a multi-year plan is sometimes developed where all topics are addressed over a two or three year period.  This provides a cost controlled way to address a fiduciary responsibility of the governing board.

Agreed Upon Procedures require CPA involvement

Not everyone can legally do this work.  State licensure laws usually limit writing Agreed Upon Procedures reports to professionals holding a CPA license.  But since not all CPAs are familiar with Agreed Upon Procedures, boards seeking such an engagement must screen the CPA firm for their relevant experience.  Further, these boards should be seeking a CPA who understands the “business” of churches – preferably by having personal experience as part of a church leadership team somewhere in life.

Lastly, the CPA need not be local.  Technology allows CPAs to perform this work remotely through telephone interviews with key personnel, mutual “screen-sharing” meetings, and examination of pdf or fax documents.  In our firm, we find these techniques to be very cost effective.

As a courtesy to churchthought.com readers, Bill has offered a complimentary consultation on how an Agreed Upon Procedures Engagement might work for your church.  Feel free to give him a call to schedule an appointment: 877-823-3101 x1.

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