Audit, auditory, and audience all come from the same Latin root “audire” which means to hear. So when something is audited there is a hearing or examination of what has transpired. When someone mentions an audit, it is often viewed with more weight placed upon the negative side than upon the positive side of the ledger. There is no doubt that a tax audit is seldom desired. But an audience to hear an artist sing is often viewed as successful when the auditorium is full to capacity. When I served as a bank manager, the bank audit was not something I looked forward to, but receiving the distinction of “job well done” was truly gratifying and rewarding. It brought closure to a previous financial period and increased the level of trust others placed in me.
Annual medical examinations are similar to financial audits. There is discomfort, anxiety, and even some change of life recommendations. In the end, you make the needed changes and thank the medical staff, knowing that they truly have your best interests in mind. Financial auditors also bring some discomfort, anxiety, and even some recommendations, but as Christ-centered auditors, the work is completed in a way that glorifies Christ and is helpful to the organization and the financial staff as well.
Some Christian organizations have an annual audit and some have never been audited. As faithful stewards we all desire for our gifts and donations to be used in a proper, transparent way with adequate transaction recording, understandable reporting, and financial accountability. While this is your desire, we should all understand that evil will attack any organization seeking to do God’s will. Fraud is a very real temptation and many Christian ministries have failed to provide adequate financial accountability to protect their organizations against this invasion. When your ministry decides to embrace financial accountability, there are still decisions ahead for you. Which type of financial audit will probably be one of your highest priorities.
Let us look at some basic categories of audits with the strengths and weaknesses of each type.
“Trust me” Audits: This is the basic audit that is employed by a large number of churches and Christian organizations. Leadership will know the financial staff and the audit is more of a character assessment rather than a true financial evaluation. Financial committees will review reports to see if the ministries are within their budget limitations. Reports are accepted as presented and decisions are made based upon these reports. The strength of this audit type is the upfront cost of zero dollars. The financial team enjoys being trusted and autonomy to carry out their work. The finance team does not have to deal with auditors taking up their time and asking difficult questions. The weaknesses of this system are many. The truth is, we serve an infallible God as fallible servants. Each of us is prone to wander and consider temptation as a plausible path to tread. The Bible is filled with example after example of God’s people getting off track and sin entering the camp. To place trust without accountability in the hands of any individual is not good leadership, nor is it biblical. Surveys have shown that more ministry funds are lost to fraud than are given to mission opportunities. Once temptation gives opportunity to sin, the reactive costs are very high. Trust among donors can drop dramatically, giving decreases, legal costs can mount, ministry funds are unrecoverable, and the worst part is the Christian brother or sister caught in the act will lose future ministry opportunities. Without adequate accountability, false accusations and gossip are allowed to spread. The perpetrator may have committed the sin of commission but the organization committed the sin of omission by failing to support their staff member(s) with adequate accountability.
Financial Statement Compilations: This is not an audit option, but, because some organizations perceive this to be an audit, I will include compilations in our discussion. This is where an external group (like a CPA firm) comes in and takes the financial data and ensures that the financial statements are consistent with Generally Accepted Accounting Principles. The work can be done off site and generally takes very little time from your financial staff to answer questions. The compilation questions normally deal with account classification. The financial statements are then compiled by the accounting firm and presented back to the organization as the auditible statements. Please note that the reports are auditible but not audited. The compilation contains very limited assurance and little or no auditing is completed. The strength of the compilation, is the organization receives a report for an external accounting firm and this provides some limited perceived assurance to donors and staff. The cost of the compilation is much less than having a full financial audit. The weaknesses are that no financial auditing of receipts or disbursements has taken place. The organization might have a false sense of security due to a signed official letter from the accounting specialist or even a CPA firm. Bank reconciliations are seldom reviewed. Internal controls are not usually evaluated. Perhaps the most significant attack against your organization is fraud and the financial compilation will do very little to address this area of concern. Once again the reactive costs to fraud would be the same as the “Trust Me” audits. Your financial person or team would be left with the same temptations and outcomes.
Volunteer Audits: Many of us have had good experiences with volunteers and also some not so good experiences. Perhaps you know of a wedding where an uncle/aunt said he/she would be the photographer and save the newlyweds a pile of money. When the images came back, the photos may have been great or they might have received less than the quality the couple desired. The same is true with volunteer audits. There are times when these audits are by professionals with vast experience and able to give adequate time to completing all the necessary audit steps and procedures. Other times volunteers may not have experience with your type of organization and/or only able to give a very limited amount of time to the task. While their hearts are in the right place, the volunteer audit results may or may not provide you with the financial accountability you seek. The strengths would include low costs. Other strengths and weaknesses would vary depending on the level of expertise and time invested in the process. Volunteers may be personal friends of the financial personnel and be less willing to report recommendations. This conflict of interest could be another weakness. The results can vary greatly but a word of caution would be that the upfront cost is not the only variable to consider when choosing the best audit or auditor.
Agreed Upon Procedures: In this type of examination, evaluations and procedures are broken into multiple year engagements or assignments given out to various auditors. One year the auditor may check vendors and another year check receivables. Internal controls may be examined by one auditor and fraud risk assessment by another group. In the medical field, annual physical examinations normally contain certain aspects each year and some tests once every five years. Weight and blood pressure and normally checked each year while endoscopic procedures are administered with greater gaps between exams. In the same way there are some audit procedures that should take place annually and some that could be spaced out over a greater time period. The strengths could be lower annual costs or audit segments assigned to various auditors with better expertise in these areas. The weakness may be in organizations trying to cut costs and not getting reasonable financial accountability in return. There may be gaps in coverage when one audit firm is not in overall charge of the audit.
CPA Audits: CPAs are experts in publicly traded company accounting and have training in financial accounting & reporting, regulation, business environment & concepts, and auditing. They are the gold standard of the accounting profession. A CPA signed audit has a higher perceived value to the general public than all other types of audits. The weaknesses are whether or not the CPA has enough experience dealing with nonprofit ministries or significant experience dealing with fraud detection. A CPA audit generally carries a higher cost to your budget than the other options listed.
Non-CPA Credential Audits: Certified Public Accountants (CPA) are the best known professionals in the accounting field, but they are not the only professionals qualified in financial accountability. One of the most devastating financial threats your ministry faces is fraud. A Certified Fraud Examiner (CFE) is the best trained specialist in the fight against fraud. In the medical field, the general practitioner may be the first doctor you see about an unusual mole growing on your arm. However the best trained doctor to examine your mole may be the dermatologist. CPAs are well trained on many different subjects but the CFE has a focus on fraud. CFEs will be able to do a fraud risk assessment, examine your internal controls, help you set up a whistleblower program, and even collect evidence & testify in court should that need arise. A CPA may have great experience in taxation or bond issuance, but very little exposure to fraud detection in a nonprofit organization. A CFE will have great experience in detecting fraud and general experience in normal auditing procedures. A Certified Internal Auditor (CIA) is well trained in basic auditing concepts. Many organizations have a CIA on staff to ensure a passing audit report when the external auditors arrive. If we continue with the medical field comparison, the CIA would be similar to a nurse practitioner. They would be able to diagnose most of the problems with your financial accountability for a much lower cost than a CPA firm. The weakness of using a non-CPA audit is the lack of credential knowledge by those outside the accounting field. The strength of a Non-CPA credential audit is higher specialty in areas of the greatest financial threat to your organization and/or lower cost.
External Contract Accounting: Some ministries have chosen to contract external accounting organizations to perform all their financial accountability needs. These firms do all the bookkeeping entries and are audited by another outside auditing firm. The strength is lower probability of fraud committed within your organization. The firms may have strong internal controls, separation of duties, and an internal auditor as well. There may be multiple employees able to meet your needs, so if one person is on leave another staff member can step in and meet your needs. Due to economies of scale being utilized, their cost per transaction may actually be lower than hiring your own staff. The weakness may be a higher cost if the external contract firm has set professional standards and has profit expectations to meet. Another detriment is the delay from the time you submit a request until the report is generated and returned to you. This delay may be greater than walking down the hall and asking for the report you need. Reports would also be standardized and creative managerial reports would be a more expensive option.
In conclusion, there are many ways to meet your organization's need for financial accountability. I would encourage your organization to do their due diligence, look at all the options listed above, and then select an auditor that best meets your needs at a reasonable cost.