Do churches need an annual audit? Can a church save money by having a review instead of a full audit? I often hear these important questions, which are sometimes followed by more alarming news. Many church representatives tell me they have been skipping annual audits, or they mention that these are performed by church members or paid staff.
Another question is, What is a review, and can it be done in place of an audit, since it is much cheaper? At the very least, each church should have its financial books formally reviewed each year by a certified public accountant who is independent and outside of the church. Churches can save money by arranging for the less-expensive review rather than a full audit, but it is important that both of these be conducted by an independent CPA. Each church member who deals with financial matters needs the protection a formal review or audit will provide. When conducted by an independent accountant, the review will ensure that the proper safeguards and internal controls (fancy words for checks and balances) are in place, guarding against public misperceptions regarding the church’s financial accounting. Because churches sometimes misunderstand the difference between a full audit and a review, let’s take a look at both.
An audit is an in-depth, detailed review of the financial statements conducted by a CPA. It includes tests of the accounting records and other procedures that would enable the auditing firm to express an opinion on the financial statements. This would include looking beyond accounting entries to the activities that caused those transactions. An audit includes consideration of internal controls, such as Who handles the money? and How are records kept? Mistakes happen, but an audit evaluates whether the proper controls (checks and balances) are in place to help the church do everything it can to avoid mistakes. An audit is very detailed and can be expensive.
A review is much less detailed than an audit, applying analytical procedures to financial data, and consisting of inquiries to personnel. A review, while substantially less in scope than an audit, is also performed by a CPA and still provides an examination of the church’s financial statements. Most importantly, a review is also considerably less expensive than a full audit.
Again, I believe every church needs to have its books and internal controls looked at and tested, for everyone’s protection. This is not a matter of mistrust on anyone’s part; it is merely part of the proper care for the church. I recommend an outside, independent audit every third year to allow the church to save a little money but still have its documents checked thoroughly. In between audits, the church should schedule annual reviews (also by an outside, independent CPA).
This chapter has touched on a number of tax issues common to churches. These business components are important to the church: the members, the leadership, and the pastor. Although not everyone in the church needs to develop expertise in all these areas, the pastor and church leaders should be familiar with the topics to protect the church’s integrity.
Michael Nolan (MBA, University of Dallas) is the director of business administration and treasurer for Regular Baptist Ministries.
Reprinted from The Business Side of Ministry, © 2011 Regular Baptist Press. Used by permission.