Parish Audits: Practical Alternatives

by | Apr 18, 2018

An annual new year’s rite in churches and other nonprofit organizations is finalizing the operating budget
for the new year, closing the financial books for the year recently concluded, and planning the annual
audit of the financial statements for the previous year. Financial accountability is among the cardinal
virtues of the Episcopal Church and the Episcopal Church Canons require all parishes to conduct an
annual financial audit and to file the audit report with the diocese by September 1 of each year.

It’s not hard to see numerous practical benefits of annual financial audits: An annual financial audit is
normative in both nonprofit and business corporations and helps assure that inadvertent bookkeeping
errors not result in bad surprises. Independent review of financial matters provides real protection to the
reputation and integrity of parish leaders who are involved in financial matters. And an annual audit
assures contributors that the funds they contribute are properly used and accounted for.

The cost of an outside audit by a CPA—typically $3,000 to $5,000 for a small to mid-size
parish—represents a serious practical impediment. After all, in the Diocese of Washington, half of our
parishes have average attendance of 100 persons or less and annual pledge and plate revenue of $250,000
or less.

In traditional audit engagements, an independent CPA samples and tests financial records for accuracy
with the goal of rendering a formal opinion that the operating statement, balance sheet and other financial
statements “present fairly, in all material respects, the financial position” of the church. The underlying
work to perform an audit is laborious and a CPA who issues an audit opinion has potential financial
exposure to third parties who rely on the audit opinion. These factors lead to the justifiably higher cost of
a traditional audit engagement.

Fortunately, the annual audit required by the canons does not have to be a traditional audit engagement by
an independent CPA. While a traditional audit engagement remains the “gold standard” for annual
financial audits, there are other alternatives that, in accordance with the canons, have been approved by
the Diocesan Finance Committee. These include an engagement of a CPA to perform “Agreed-Upon
Procedures” and a Committee Audit performed under the Manual of Business Methods in Church Affairs.

Numerous parishes in the Diocese of Washington have helped pilot canonical audits conducted under an
Agreed-Upon Procedures (AUP) engagement. In an AUP engagement, a CPA performs a more basic
review of a congregation’s financial statements, but devotes primary attention to the congregation’s
internal financial practices and controls. The deliverable in an AUP engagement is a report summarizing
findings and recommending actions to improve the congregation’s financial practices. The cost of an
AUP is less than the range noted above for audit engagements. At least as important, in practice we’ve
found the AUP to provide immediate practical value and benefit to congregations.

A Committee Audit performed under the methodology contained in the Manual is very similar to an AUP
– except that a committee of individuals from within the congregation carries out the process. A number
of congregations in the Diocese carry out a Committee Audit for another congregation, and vice-versa.
The Manual is available online and Chapter VI details the methodology for Committee Audits.

If you have any questions or suggestions, or desire referrals, please contact Paul Cooney.