Ask Rich . . .
Richard Hammar is the legal counsel for the Assemblies of God national headquarters. Each day, The Council Today will post a response from Hammar to a question he is asked frequently.
Question: Should our church have an annual audit?
I do not have a “rule of thumb” in deciding whether or not a church needs an audit. However, let me make a few observations that may be helpful:
First, in some cases, churches are required to have an audit. Here are three common ways that this occurs: (1) A church’s bylaws or other governing document requires an annual audit. (2) Churches that issue securities as part of a fund-raising program must have audited financial statements that are included in the “prospectus” or offering circular that is provided to investors and potential investors. (3) In some cases, a bank may require that a church have an audit in order to qualify for a loan.
Second, even if a church is not required to have an audit, there are still compelling reasons why it should consider having one. Most importantly, an audit promotes an environment of accountability in which opportunities for embezzlement (and therefore the risk of embezzlement) are reduced. And, the CPAs who conduct the audit will provide the church leadership with a “management letter” that points out weaknesses and inefficiencies in the church’s accounting and financial procedures. This information can be invaluable to church leaders.
Third, audits can be expensive, and this will be a very relevant consideration for smaller churches. Of course, the time involved in performing an audit for a smaller church will be limited, which will result in a lower fee. Churches can control the cost of an audit by obtaining competitive bids. Also, by staying with the same CPA firm, most churches will realize a savings in the second and succeeding years since the CPA will not have to spend time becoming familiar with the church’s financial and accounting procedures.
Smaller churches that cannot afford a full audit may want to consider two other options: (1) Hire a CPA to conduct a review, which is a simpler and less expensive procedure. If the review detects irregularities, a full audit may be considered worth the price. (2) Create an internal audit committee if there are accountants or business leaders within the church who have the ability to review accounting procedures and practices and look for weaknesses. These people often are very familiar with sound internal control policies, and will quickly correct weaknesses in the church’s financial operations. An added bonus — such a committee will serve as a deterrent to those who might otherwise be tempted to embezzle church funds.