Q. Why is the Conference establishing a requirement to have periodic audits performed?
A. Church members and others provide substantial financial resources to local churches, and expect church staff and lay leadership to provide proper oversight of such resources to ensure such resources are (1) used in a manner consistent with that expressed through the church’s annual operating budget and through donors’ designations, and (2) adequately safeguarded from improper use or loss. In order to meet these expectations, the Conference’s CF&A group believes it is important that the church’s Finance Committee (or other governing body responsible for oversight of the church’s finances) have confidence in the accuracy and completeness of the financial information the Finance Committee (the Committee) receives in order for it to carry out its responsibilities. The purpose of these procedures is to supplement (not replace) the church’s system of internal controls in enhancing the reliability of the financial information used by the Committee and others in the church and to help in deterring the intentional misuse of the church’s financial resources. The requirement for an “audit” is also included in the United Methodist Book of Discipline (although the nature and scope of such audits are not specified.)
Q. Why is the CF&A offering an alternative to churches in lieu of requiring churches to have an audit performed by independent auditors in accordance with Generally Accepted Auditing Standards (GAAS)?
A. There are three primary reasons why the CF&A believes these minimum agreed upon procedures offer a positive alternative to having independent audits of local churches’ financial statements performed in accordance with GAAS (referred to hereafter as “full financial statement audits.”)
1) Cost – Full financial statement audits are certainly comprehensive, and remain as an appropriate option to meet the goals outlined above. However, full financial statement audits are more costly than having the agree-upon procedures (AUP’s) performed. While not as comprehensive as a full financial statement audit, we believe having these procedures performed achieve a substantial portion of the benefits at a lower cost.
2) Practicality – In order to have a full financial statement audit, it is necessary for churches to maintain their accounting records in accordance with generally accepted accounting principles (GAAP). Many churches do not maintain accounting records in full accordance with GAAP (e.g., fixed assets not recorded on the balance sheet, expenses recorded on a cash rather than accrual basis), and would have to modify their accounting practices to meet GAAP standards with little or no benefit to the church. In addition, full financial statement audits require that churches’ beginning balance sheets be audited in order to complete the full financial statement audit for a given year. This requirement makes it impractical to have full financial statement audits performed unless such audits are performed annually. The AUP’s do not require beginning balances to be audited in order for the AUP’s to be performed.
3) Benefit of financial statements prepared in accordance with GAAP – Presentation of audited financial statements requires the presentation of not only a balance sheet, statement of operations (income statement) and statement of cash flows but several pages of footnote disclosures. While these disclosures are often beneficial for our largest churches in aiding the church staff and leadership’s understanding of such churches’ finances and in their management of the churches’ operations, that is generally not the case for most churches in the conference. We believe the AUP’s are another means to obtain many of the benefits of a full financial statement audit without incurring the expense of developing the footnote disclosures that may be of little or no benefit to the church staff or members.
Q. What kind of report will the independent accountant prepare for the church and the conclusion of the procedures, and how might that report be of use to the church staff or church committees?
A. The independent accountant’s report will be a narrative describing the procedures performed, and the results of those procedures. The report will not include any financial statements or footnotes. While the report is an important component of a successful engagement, we also believe the in-person review of the report with the Committee or its designees is a very important part of the effort.
We believe the report will provide the Committee valuable information concerning the sufficiency and effectiveness of the Church’s internal controls. The report should also provide an opportunity for staff and Committee members to reinforce the importance of establishing and maintaining adequate controls involving other Church staff and committees.
Q. How frequently must these procedures be performed?
A. The frequency of these procedures depends on the annual TOTAL amount of funds received by each local church from all sources (i.e., the average annual total combined funds received through the operating budget, designated or restricted gifts given for a particular purpose, monies received for capital buildings or improvements or for debt reduction, endowed funds received, and funds received from any other sources for the prior three years.) If the total funds received by a local church exceed $2,000,000, the local church should have these procedures performed annually. For those local churches who annually receive total funds of less than $2,000,000, but more than $1,000,000, those churches should have these procedures performed once every two years. For those local churches who annually receive total funds of less than $1,000,000, but more than $500,000. Those churches should have these procedures performed once every three years.
Q. What should a church expect to pay to have the procedures performed and a report prepared?
A. The cost to have these procedures performed and report prepared will vary from church to church, but we would expect in most instances that this work will require approximately 40-60 hours to complete. Given that estimate and depending on the time of year such procedures are performed, we would expect the cost to range from $2,500 to $5,000.
Q. Are there ways a church can reduce the cost of having an independent accounting firm perform these procedures?
A. Yes. Most accounting firms are very busy for the first several months of the year, but have lower workloads in the summer months. Accordingly, many firms are willing to perform work during summer months at discounted rates. In addition, the church’s accountant(s) can often perform certain administrative tasks for the independent accountant(s) (e.g., making photocopies, pulling supporting documentation required for testing, returning documents to church files once testing has been completed) that will make the independent accountant’s work more efficient (and thus less costly.) Finally, the independent accountant performing the work will often have questions of the church’s accountant(s). Having full access to the church’s accountant(s) during the completion of the work will also greatly enhance the efficiency of the accountant(s). Accordingly, performance of the AUP’s should be scheduled at a time when the church’s accountant(s) is (are) present, and will have time to answer questions raised by the independent accountant.
Q. How are these procedures different than having an audit of the church’s financial statements performed?
A. The AUP’s are generally not different than those that would be performed during an full financial statement audit, but rather are a subset of the procedures most accountants would perform during a full financial statement audit.
Q. Did the CF&A consider allowing churches to have an accountant’s “review” performed in lieu of these procedures or a full independent audit?
A. Yes, we considered the option of a “review” engagement, but believe the performance of the AUP’s provide a much larger benefit to local churches at a similar cost. Accountant “review” engagements typically involve little or no actual testing, but instead rely almost wholly on analytical reviews combined with inquiries of the church accountant and perhaps other staff. In addition, “review” engagements would again require the church to prepare not only a balance sheet, statement of operations and a statement of cash flows but the same footnote disclosures as required for fully audited financial statements. As noted in response to a previous question, we believe the church’s resources are better spent having actual audit tests performed than preparing footnote disclosures and having the adequacy of those disclosures assessed for accuracy and completeness.
Q. Can a church elect to have other procedures performed in addition to those outlined in the Conference’s “Minimum Agreed Upon Procedures?
A. Yes. The procedures outlined by the Conference are established as a minimum, and are not intended to limit work churches might otherwise wish to have performed. However, no procedures outlined by the Conference in the list of procedures to be performed should be deleted, nor should the scope of work outlined in those procedures be reduced from scope described.