Transparency In Ministry

In prior postings, we discussed the reasons an external independent auditor would request their client to sign a management representation letter as well as who should sign the letter. In this post, we will discuss the typical content of the letter.

The letter itself, including the written representations, should be addressed to the auditor. Because the auditor is concerned with events occurring through the date of his or her report, the representations should be made as of the date of the auditor’s report.

The specific written representations obtained by the auditor will depend on the circumstances of the engagement and the nature and basis of presentation of the financial statements. At a minimum, the following topics are normally addressed in the letter:

A. Financial Statements - management's responsibility for fair presentation and beliefs re: conformity with GAAP.

B. All requested information is complete.

C. Management's responsibility to prevent and detect fraud.

D. Subsequent events.

E. Related party transactions and guarantees

F, Significant estimates and material concentrations known to management

G. Certain Significant Risks and Uncertainties - including violation of laws/regulations; unasserted claims or assessments and litigation.

H. Compliance with contractual agreements

One other concept is that management's representations may be limited to matters that are considered either individually or collectively “material” to the financial statements, provided management and the auditor have reached an understanding on materiality for this purpose. Typically, material items are items such that would cause a reasonable person to have a different assessment of the entity’s financial position if they proved to be different than what is stated in the financial statements.

Please feel free to contact us if you have other questions.

In our previous post discussing record retention, we noted that it is important for churches/ministries and other organizations to discuss and adopt a record retention policy.

What should be maintained and how long?

The legal department for the General Council on Finance and Accounting has provided certain information for retaining documents. For instance, articles of incorporation, amendments and bylaws should be maintained permanently. Tax returns should be maintained permanently and the worksheets and supporting documents for the tax return should be maintained by 7 years. Additional guidance on record retention can be found using the following link.

The Presbyterian Historical Society also provide information for record retention. Congregation records retention requirements can be found using this link.

For more information or clarification on record retention, contact us.

Good record keeping enables individuals to easily take advantage of all the tax credits available under the IRS code. Properly maintaining receipt and payment information provides reliable information that should be used in substantiating the costs to maintain a minister's residence.

Housing allowance is another part of a minister’s compensation that is not subject to federal or state income tax. The church board usually determines the housing allowance, and it is generally set based on the minister’s estimate of his housing expenses. For tax purposes, the amount actually allowed is the lesser of the amount set by the board, the actual expenses incurred or the fair rental value of the minister’s house (furnished plus utilities).

In order to quickly and accurately determine the amount of the housing allowance available at year end, it is a good idea to keep track of mortgage payments (principal, interest, taxes & insurance), rental payments, furnishings, utilities, repairs, maintenance, appliances, household cleaning items, yard maintenance and tools.

At year end if the housing allowance paid exceeds the amount of expenses incurred or the fair rental value of the property (fully furnished), this excess amount will become taxable, so it is a good idea to keep track of ALL expenses by saving receipts, statements and cancelled checks (or the bank record of such checks).

See our third post as we discuss additional items representing income.

The IRS has published a list of frequently asked questions relating to the new electronic filing requirement for small tax-exempt organizations. We have discussed this form and the requirements in previous blogs, but the IRS Q&A will be helpful if your ministry needs to file a 990-N and you still have questions.

The last item on the IRS list provides a link to sign up for the IRS’s Exempt Organizations Update, an e-mail newsletter that highlights new information posted on the Charities pages of irs.gov. To subscribe, go to www.irs.gov/eo and click on EO Newsletter.

If your address has changed and the IRS has not been notified, you should file Form 8822, Change of Address with the IRS. This will ensure that you receive the notification letter on the new form.

If an organization fails to file the 990-N for three years it may have its tax-exempt status revoked. Hopefully, it will never come to this. However, if it does, the IRS will require filing of Form 1023, Application for Recognition of Exemption, or Form 1024, Application for Exemption Under Section 501(a), to be reinstated. They are serious about getting this new form filed!

If you have any questions that our blog and the IRS site did not clear up, please contact me.

Setting the tone at the top is a key requirement of board governance. Management must establish standards of conduct and follow them. These standards contain the values, philosophy and mission or the organization.

How does this impact the Organization's audit?

Recent changes to the audit standards require the auditor to evaluate the “control environment”. This term is one of the five elements of internal control as defined by the Committee of Sponsoring Organizations (COSO) in the early 1990’s. The Sarbanes Oxley Act of 2002 also encompasses this concept in federal legislation directed at public companies. Those charged with governance (boards) and management (senior pastors) should ask themselves how have they conveyed their attitudes regarding fraud and ethical values to others within their church or ministry. This is a question your auditors will be asking you.

Contributions represent the largest source of income for most charitable organizations. Churches are classified as a charitable organization, or a 501(c)(3) and they are funded almost entirely by contributions. Understanding the rules for contributions and developing procedures to comply with the technical legal rules is important.

A contribution can be defined as an unconditional transfer of cash or other assets. The donor does not receive a benefit in exchange for the item transferred. In accordance with section 170 of the tax code (also see Publication 526 for additional information) and in a excerpt provided by Church and Clergy Tax Guide - 2007 - a charitable contribution generally must satisfy the following 6 requirements:

1. Represented by a gift of cash or property. An individual cannot take an itemized deduction (Form 1040, schedule A) for donated services.

2. The contribution should be claimed in the year in which the contribution was made, (i.e., delivered). One exception is allowed for a check mailed to a charity – deductible in the year the check is mailed and postmarked.

3. The contribution has to be unconditional and of no personal benefit.

4. The contribution should be made to and for the use of a qualified charity.

5. The contribution should be within the allowable legal limit (relates to deductibility for the individual.)

6. The contribution must be properly substantiated, (i.e., verified).

We will talk more about each of these requirements in subsequent posts.

Straight from FASB's Norwalk Connecticut Headquarters:

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) approved a revised definition of what constitutes an asset on October 22, 2007, the first day of their two-day joint meeting.

Following a discussion as to how to replace the word “control” that had been used to link an entity and an economic resource in the prior definition of asset, the Boards agreed to define an asset as a present economic resource, which, through an enforceable right or other means, an entity has access or can limit the access of others.

This revision replaced the word "control" that had been used to link an entity and an economic resource in the prior definition of an asset.