If you follow church accounting news, you know there has been quite a controversy surrounding the IRS, the Freedom From Religion Foundation (FFRF), and church audits.
It all began in 2009, when a Minnesota church successfully challenged the IRS over its procedures for auditing churches. The judge in that case ruled in favor of the church. The court decision meant the IRS could no longer audit churches until its church audit procedures was revised.
Then in 2012, the FFRF filed lawsuit against the IRS's alleged “preferential treatment of churches”. In July 2014, the FFRF agreed to drop its lawsuit after "receiving satisfactory assurances from the IRS that it has resolved internal policies preventing examination of church politicking claims, and no longer has a blanket policy or practice of non-enforcement of political activity restrictions."
According to an article on the ECFA site: IRS Commits to Auditing Churches but Keeps Procedures a Secret ... "The IRS has declined requests to comment on the case or to provide details regarding the settlement. So, while FFRF has reportedly been provided with information on the IRS’s policies and procedures for auditing churches, everyone else is left to wonder for now."
So in light of what is happening in this "not so church-friendly" administration, it is imperative church administrators ensure their organizations are "in order".
One way is through church audits internal and external and/or hiring a qualified accounting firm such as Wisdom Over Wealth to do a Church Checkup engagement.
Church Accounting Package
A set of 4 ebooks that covers the following topics...
internal (reviewed by business people in your
organization who understand financial management and are not related in
any way to the person preforming the financial tasks in the church).
Audits or AUPs are the best way to:
Protect the persons your organization elects to offices of financial responsibility from unwarranted charges of careless or improper handling of funds;
Build the trust and confidence of the financial supporters of the organization in the way their money is being accounted for;
habits of fiscal responsibility to assure that when there is turnover
in personnel there will be continuity in accountability;
made to the organization with special conditions attached are
consistently administered in accordance with the donors' instructions,
and thereby letting donors know their contributions are being used as
Provide checks and balances for sums received and expended.
Remember...an Audit or Agreed Upon Procedures engagement is not a reflection on the competence or integrity of your
financial staff. Rather, it is a routine procedure designed to protect
both your staff and your church.
An Nonprofit or Church Audit Should:
Independently verify the reports of the treasurer(s);
Follow the funds and see if proper steps are being taken in handling them;
Document that donated funds have been used as stipulated by the donors.
In addition to tracking the cash through the system, an auditor typically will evaluate:
Accounting controls (systems that reduce the possibility of loss or errors)
Segregation of duties (assurances that more than one person is involved in critical steps in handling money so that there can be checks and balances)
Reasonableness of systems and procedures in the light of all factors, including the size of the organization and its budget
Adequacy of insurance coverage
Records that show donors' stipulations for the use of contributions made to your organization
Documents to have Available:
Whether it is an external or internal audit, there are certain documents you will need to have available.
of all your organizations policies and procedures related to finance
and treasury functions and copies of minute approving those policies.
of all bank and investment accounts, including the person authorized to
sign on each, and including any special use accounts under the control
of the pastor(s) or administrator and in the name of the nonprofit or
All financial statements for each month of
the year, plus December of the prior year and January of the subsequent
year (a fourteen month period).
Bank and investment account statements for the same period.
Bank reconciliations for that same period.
books of entry, which will be the general and subsidiary journals; for
those books that are computerized, a print-out of all transactions by
account for the entire year.
All paid invoices,
payroll data and files (including 941's, year-end W-2's, 1099's and
transmittal forms), income transmittals and deposit records for the audited period.
The Financial Secretary's records and other income records for the same period.
An internal nonprofit or church audit consists of selected auditing procedures performed by individuals inside your organization rather than by an outside CPA.
Internal audits can be a very cost effective means of improving the organization’s system of internal controls without the expense of a full scope outside audit. They can ensure that the organization’s system of internal controls are operating as intended.
The internal auditors should develop an audit program and an audit schedule.
Your nonprofit or church may want to consider consulting with a CPA who is familiar with auditing to assist the organization in designing the internal audit program and training the internal auditors.
Once the audit program has been effectively designed and documented, the nonprofit or church should be able to use the program for several years with only limited involvement of the outside CPA.
Internal Auditor Qualifications:
Generally, a person(s) who is "qualified" to perform an internal
nonprofit or church audit will have some experience with accounting principles,
those gained through bookkeeping, office management, or accounting
The person(s) must have the time to devote to the internal audit as it is quite a lengthy process.
Need training on how to use QBO or Aplos effectively for a church or better yet ...need an expert in either of those accounting software to do your monthly bookkeeping and/or payroll? See more on our accounting services!