Many prospective donors are very skeptical about making donations, fearing that their money will not be used properly. A nonprofit or church audit is a process that provides reasonable assurance that good stewardship is being used in handling and accounting for donor’s money and other assets of the nonprofit organization.
The audit can be performed by external Accounting firms (or by an outside Certified Public Accountant). It can also be done internally-in which case the books are reviewed by selected non-related officers, or by prominent people in the nonprofit organization who understand financial and business management. These internal individuals should not be related in any way to the Financial Officers, thus avoiding a conflict of interest.
You may be pondering the idea of having an audit done in your nonprofit organization. You may be thinking of the cost, or the time involved. Listed below are some of the many benefits why you should have an audit done-the list is not exhaustive:
(1) A Charitable organization must comply with all applicable federal laws and regulations, applicable laws and regulations of the states and the local jurisdictions in which it is based or operates. An audit should ensure there is compliance.
(2) An organization conducting charitable programs outside the United States must also abide by applicable international laws, regulations and conventions that are legally binding on the United States.
(3) It will help to protect the officers of the corporation who are in charge of financial responsibility, from unnecessary charges of carelessness or misappropriation in handling funds.
(4) It sends a favorable message, and builds the trust and confidence of the financial supporters of the organization, who have a vested interest in how their money is being spent.
(5) It encourages good habits of fiscal responsibility to ensure that new employees will more likely continue to follow accountability principles already in place.
(6) It will assure that contributions made to the organization with stipulations as to how the funds should be used, are consistently used in accordance with the donor’s instructions, conveying to donors the assurance that their contributions are being used as intended.
(7) The auditors will be looking for an audit trail–It provides very important checks and balances for sums received and expended.
In general, most nonprofit or church audits are internal, consisting of selected auditing procedures performed by individuals inside the organization rather than by an outside CPA. This approach is useful in reducing the cost of internal control measures and audits.
These internal audits can be continuous, thus ensuring daily compliance. The internal auditors will most likely develop an audit program and an audit schedule that will be checked off. Most CPAs are knowledgeable in this area and should be consulted for initial set up and training assistance.
Those nonprofit organizations-including small churches-who do not conduct audits or have a set of written principles, should consider doing this as a necessity. From a practical standpoint I recall being the Secretary/Treasurer of a small church that did not conduct audits. However we ensure that there were adequate internal measures in place to ensure accountability.
The scope of this article is not to set out detailed internal control measures, consequently the list below is a partial representation of the control measures necessary:
• Do expenditure budgets, obtain members and board approval to ensure planning and cost control.
• Depositing all receipt intact; no removal for church expenses.
• At least two responsible individuals count and sign off on cash receipt.
• The church accounting done by persons that do not handle cash.
• Two signers needed for all checks.
• Check requisitions mandatory, itemizing items to be purchased.
• Expenditure cost justified and for a church purpose
• No commingling of church funds with personal funds.
• Periodical meetings with members to explain the finances.
• Invite active participation at meetings
• Sending out annual statements to all contributors.