Surviving a Church Financial Audit

Preparation and good documentation can make the process less stressful for church leaders.

Audit. It’s a dirty word among some church administrators. And we’re not even talking about an IRS tax audit, which conjures up images of intimidating government agents whose sole mission is to uncover your financial misdeeds. We’re talking church financial audits, the kind that provides invaluable feedback on the financial integrity of your organization. So why, if a financial audit is a good thing, do so many financial administrators dread the annual audit more than any other aspect of their jobs?

“When we think of audit, we think of a process where someone is trying to catch you doing something wrong, like the IRS audit,” says CPA Vonna Laue, a former partner with CapinCrouse LLP, a national CPA and consulting firm. While the word audit has negative connotations, church auditors want churches to understand that there to help them do their ministry the best they can, Laue says.

Different from a tax audit, Laue’s job during an audit is to assess organizations’ accounting practices, procedures, and reporting. While her services are invaluable to the churches she serves, her presence is a double-edged sword.

“Audits are a disruptive process,” says Laue, who also serves as a senior editorial advisor for Church Law & Tax. “Most church staffs are limited, and I’m asking them to do more work. An audit is more of a frustration or hassle rather than a fear. Unfortunately, as an auditor, nobody’s happy to see you come, and everyone’s glad when you leave!”

Michael Miles, financial administrator at Wheaton Bible Church, a 2,500-member suburban Illinois church, has been involved in audits at his church for the past 10 years. “First you meet with the outside auditor, and they ask for a number of schedules,” he says. “Preparing schedules takes a lot of time because usually it’s for areas you only think about once a year, so you always have to stop and think about how you did it last year. Plus, the burden of creating these schedules is on top of our extra workload.”

For Miles, and most church financial administrators, that means processing Sunday revenues on Monday, processing vendor payments on Thursday, and preparing staff payroll on another day.

“At the same time we’re managing our weekly tasks,” Miles adds. “We’re also preparing for our church’s annual meeting, getting budgets put together and approved, performing mandatory IRS reportings like W-2s, and creating contribution reports. This makes preparing for the annual church audit the most stressful part of my job.”

As Miles describes, the workload for financial administrators is relentless, which is often the reason why churches aren’t prepared to face an audit. But Miles has learned some tricks.

“Preparation is the key to having an audit run smoothly, he says. “You can’t wait until November to begin gathering all the information you’ll need for a year-end audit.”

Miles meets weekly with his boss, Scott Landon, director of finance and administration to review audit-related issues throughout the year. “As we get closer to the actual end-of-year audit,” says Miles, “we’ll meet more frequently—sometimes several times a day.”

Another key to successful audits: “Take good notes all year long on all functions that involve finances,” says Miles.

Landon, a former partner with CapinCrouse before coming on staff at Wheaton Bible Church, echoes this same advice.

“There were a few churches I audited when I worked for CapinCrouse that didn’t keep fixed-asset records. This made their audits really painful because they had to go back, dig up all the church board meeting minutes to find out how much things had cost, how much value could be depreciated—all those details that are better tracked throughout the year.”

Laue agrees. “Having a monthly closing process is very helpful. Churches should identify accounts that need to be reconciled each month. For instance, your bank account needs to be reconciled every month.

She stresses the importance of “reconciling your salary expense with your payroll report, reconciling your donor system to your general ledger contribution account. These are examples of reconciliation that, if done on a monthly basis, make your end-of-year so much easier.”

According to Laue, the first-year audit is the hardest. Again, good documentation always saves the day.

“A first-year audit is tough because you have to test all the beginning balances,” she says. “There have been a number of times when trying to determine the cost of a building, we’ve been able to go back to board minutes from 20 years ago and find the contractor’s bid and final invoice. It’s amazing how helpful good documentation can be.”

First-timers need to know that preparation for the audit is going to take a significant amount of time. “If people put off looking at the prep list until the Friday before we’re supposed to come out, that won’t be enough time,” warns Laue.

It’s very important to ask questions, especially if there’s something on the prep list that isn’t clear. “Don’t spend unnecessary time running around for information you’re not clear on,” Laue advises. “If you’ve got information in a different format than what the auditor has asked for, find out if they can use it. A good dialogue is important.”

Getting ready for the big day

So exactly what happens when you hire a CPA to do a church financial audit?

“Typically an organization will contact us and say they want to have an audit done, or we’ll have a recurring engagement with them every year,” explains Laue. “We’ll talk to them before year-end and see if there are any significant changes we should be aware of. We send out a letter of engagement, which spells out what the fee and our dates of the audit will be.”

Six weeks before the audit date, Laue sends the client a prep list, which serves as the guideline for what to gather and prepare before the auditors arrive.

Laue’s prep list contains about six pages of specific information that divides into four general areas: 1) corporate/governing documents and long-term agreements; 2) internal controls—checklists and interviews; 3) accounting records and support to verify records; and 4) information for footnote disclosures.

Along with scrutinizing financial documents and all supporting records to ensure a church’s financial integrity, auditors also assess a church’s internal controls. Internal controls are the processes a church has in place to safeguard the assets of the church.

“First, we have the church complete a number of checklists, most of which are related to their internal controls,” says Laue. “During the audit process, we talk through the internal controls they have in place, and we formulate our audit testing based on those controls. Our prime concern is that a church’s internal controls are adequate to protect the church’s assets.”

Landon sees this part of the audit process as invaluable. “Audits help evaluate where your risks are in the way you’re tracking, managing, and reporting your church’s finances, and what controls you have in place so the auditors can rely on the information you put forth,” adds Landon.

“When we get onsite and begin the manual auditing process,” says Laue, “we spend a lot of time verifying the information a church has prepared, such as the schedules and supporting documentation, whether that’s an invoice, bank statement, or a copy of a check from a donor.

“We’re physically verifying records, interviewing individuals, and reviewing processes. For instance, we’ll learn how a church processes its cash receipts, and then we’ll walk through this process with them to observe how it works. If they say they have two ushers who count the funds, put together the count, and initial the sheets, we gather all of their count sheets to validate that there are two signatures on each one. We can see sealed bags on Monday and know how they did collection.”

Laue emphasizes that internal controls protect the church’s money as well as the individuals who handle funds.

The value of an audit

Is the information gained in an audit worth the time, money, and hassle? Landon and Miles declare a resounding, “Yes!”

“Our church board relies on our annual audits to give them a complete and reliable picture of our church’s finances,” Landon says. “If we didn’t provide the kinds of reports we get from an audit, our leadership would not be making informed decisions.”

Granted, Landon’s experience as a former financial auditor gives him a deeper understanding of the value of an audit. But his coworker, Miles, concurs.

“The auditors may be able to highlight for our board that we’re understaffed and need more support to be able to meet all of the compliance levels they require,” says Miles. “Many more problems would come up if we didn’t do our annual church audit.”

How to make the most of an audit

Auditors spell out their findings in a report after the onsite audit has been completed.

“A full church audit report contains three main components,” explains Laue. “First we prepare an auditor’s opinion, then the financial statements, and finally the footnotes—basic information about the organization, the accounting principles they use, and information a reader of the report will need to understand the financial statements.

“My job is like a jigsaw puzzle. The only problem is when you get to the end and there’s one piece missing. This is frustrating, but it is fun putting all the pieces together.”

The auditors opinion basically states that the financial statements the church is releasing have been reviewed by a CPA and are deemed trustworthy. This auditor’s opinion provides assurance that the church is operating aboveboard financially and is upholding their fiduciary duty to the church.

Along with the auditor’s opinion, the auditing firms may also issue a management comment letter. Such a letter will offer recommendations for making improvement and details what areas are out of compliance. This can help a church “avoid penalties or assessments,” Laue says.

A number of churches’ bylaws require that the church undergo an annual financial audit. “You’d be surprised how many calls I get saying, ‘We just read our bylaws and realized we’re supposed to have an audit.’” says Laue. “And it’s been 15 years since their last one!”

Laue says auditors who serve churches want to help them do ministry as effectively as possible.

“This is a positive element of the audit process,” she explains. “When a church tells us they’re doing a particular ministry because this is what they feel called to do, we’ll say, ‘If this is the direction God’s calling you, then do it. But we’re going to come alongside you and help you do it in the best way you can.”

Churches are becoming savvier financially, but oftentimes the church’s ministry supersedes the accounting of it, so good financial practices take a back seat to ministry.

“I understand this mentality,” Laue says, “but at the same time, churches need to know the implications that can come about from not being financially aware. We also ought to consider ourselves held to a higher standard.

“We’re an example to the world first of all, and secondly, we’re using resources that have been given by members with the intent to do ministry, so there’s a higher standard we need to live by. I’m hoping churches will begin to understand the importance of this and avoid becoming the next big story.”

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