Audits

Cover Letter from the Treasurer

To:             Vestries and Vestry Committees and their respective Treasurers
From:        Michael J. Kerr, Treasurer/Chief Financial Officer
Date:         March 2, 2012
Re:            2011 Audit of Church Accounts

The diocesan canons require that an annual audit of church financial records be submitted to the Office of the Bishop.  The canonical deadline for filing the 2011 audit is August 31, 2012.

There are three methods for completing your church audit:  

First, an outside audit firm may be employed, but please be sure to forward a copy of their entire audit report, the supporting management letter and your church response to issues raised by the auditors.  An “audit” or a “review” are acceptable levels of reporting, however the third level of audit work, a “compilation”, is not acceptable.  If your church’s year-end financial documents and supporting papers are in a clean and accessible format, this will reduce the billable hours required by your auditors.

Second, your church may use the Diocese of Virginia internal audit program which is based on the Manual of Business Methods in Church Affairs (Revised 2009).  This internal audit program is a usable and proactive process for an audit committee to assure each congregation of their financial position.  The provided program should be directed to the person(s) responsible for the audit process.  There is a “short-form” audit for churches with total operating budgets of less than $150,000, and these pages should be used rather than the longer format.  The attached proof of cash form is to be completed for all church accounts in accordance with national and diocesan canons.  

The third form is now in its fourth year and this is a process known as “Agreed Upon Procedures”, or AUP, and involves the contracting of a CPA, or audit firm, to test specific information.  This is not meant to be a GAAP audit and there should be no expectation that an opinion will be issued by the involved CPA or audit firm.  It is my hope that this option provides a hybrid model for churches that seek external assurance of their financial position at a reasonable cost.

There are three posted documents for the AUP option.  The first is a sample engagement letter that the auditor/firm will provide to the church once they have reviewed what is asked of them in this model.  Included with this document is a sample of the procedures the firm is to use.  A firm may have an existing form for limited engagements, but please be certain of what they intend to accomplish for you and submit based on their testing of the Church Financial Report.  The second and third documents are the instructions for the report and an excel template for the production of the Church Financial Report.  The fields will self-adjust as you enter data.  As a reminder, the church is responsible for the completion of the underlying Church Financial Report that the auditor or firm will test against.


One item to be clear on is that charitable contributions must be claimed in the year they were delivered.  A contribution must either be in the hands of the church or postmarked by December 31, 2011 to be considered a contribution for 2011.  Pre-dated checks delivered after the end of the year are contributions for 2012.  If you have questions on this, please call me.

While not directly tied to the audit process, this is a reasonable forum to bring up two relevant church issues.  First, in the past year and a half, there has been a good deal of movement related to allowances for clergy housing.  In 2011, the U.S. Tax Court ruled that a priest owning two homes, with neither home being used for commercial purpose (such as being rented out for a portion of a year), could claim an allowance for each home.  On February 8, 2012, the 11th Circuit Court of Appeals reversed the Tax Court ruling, returning to the long-time status quo of one housing allowance being possible for any one cleric or for a clergy couple.

Secondly, from time to time, the question is raised as to the taxation and accounting for the use of sabbatical money.  If a priest receives compensation from the church employer, the compensation is treated as income.  If the compensation is funded from a grant for sabbatical planning, it is treated as compensation.  What can be excluded from such compensation reporting (W-2) are program expenses paid by the church employer directly to the sabbatical program provider (perhaps a university or seminary).  Some business expenses paid by the church on behalf of the priest for continuing education can be excluded from W-2 income, providing the program of continuing education was approved in advance by the vestry. Clergy should be cognizant of the potential tax consequences during sabbatical preparation.

Please make every effort to complete a review of your financial records using one of these approved forms of documentation.  Simply sending me a letter stating that you consider your finances to be in order does not qualify as submitting an audit.  

Being current in your audits is a condition for approval of church debt, should your church require Standing Committee approval per the diocesan Canons.  As a matter of due diligence and responsibility, I encourage every vestry and vestry committee to look at all internal business practices, particularly control issues related to receipt and management of cash.  Of course, annual reviews should always cover investments, property and insurance coverages, etc.

A list of prior year’s audits is maintained in the Journal of Annual Council.  If you have questions or need assistance, please feel free to contact Ms. Millie Lofton or myself at 1-800-DIOCESE, or you may email us at mlofton@thediocese.net or mkerr@thediocese.net .  

A printable copy Audit_Cover Letter.pdf  is available here.

Forms for 2011

Forms for 2010

Forms for 2009

Prior Year Audit Forms are available from the diocesan office.  Please contact Mike Kerr or Joy Buzzard.