Category CSE Magazine
Title Proving Worthy of Financial Trust
Author/s Bret Wichert
Preview Compared against data from prior years, annual financial statements help parents understand how tuition payments and fund-raising activities keep your school financially viable.

Trust is the bedrock of your relationship with your school community. It's the reason parents put children in your care. Parents allow you to teach their children values, facts, and methods of thinking because those parents trust you to do a good job.

Though families know that Christian education is valuable, they also know it's costly. They invest significant time and money in your Christian school because they take their educational responsibility seriously. While some parents may view a Christian education as simply a purchase- perhaps a luxury item-many of your families sacrifice to have their children attend because those parents earnestly seek the best possible outcome for their children.

When you are successful in generating parental participation-support of school spirit, involvement in fund-raisers, whatever-those parents become invested in making your school the best. It should come as no surprise that those same parents carry their high expectations into their perspective on your school's finances. In a certain real sense, the funds you spend aren't yours-they are theirs!

We frequently call a high level of interest "ownership." So it should be no surprise that your "owners" need reassurance that the school is wisely spending "their" money. To earn and strengthen this trust, you need to be willing to collect financial information, summarize it in a meaningful form, and distribute it to interested parties.

The most accepted way to provide key financial data is to publish an annual financial statement. Compared against data from prior years, annual financial statements help parents understand how tuition payments and fund-raising activities keep your school financially viable. Financial statements need to be compiled using accounting standards for not-for-profit organizations. The gold standard of financial presentation is an audited set of financial statements.

Presenting audited statements means that an independent trained and certified professional has examined and tested the accounting transactions and records for the period covered in the financial report. The professional has verified the accuracy and completeness of the records and has expressed his or her professional opinion that the presentation of these transactions meets professional accounting standards. From year to year, the classification and treatment of transactions is consistent, allowing comparisons between years and, with careful analysis, even between different schools.

An audit is more than a set of figures. The most important outcome will be the auditor's report, or "opinion letter," which attests to the fact that your statements have been prepared in accordance with generally accepted accounting principles and audited in conformity with generally accepted auditing standards. Behind these two phrases are the objective principles and standards of the auditing profession-a wealth of knowledge and experience.

The value of making audited statements available to your school family-parents, donors, and others-is that it reciprocates the trust that parents have placed in you. It shows that you take your responsibility seriously and that the statements are of the highest professional quality, as verified by an independent third party.

Of course, asking a third party to vouch for the accuracy of your statements isn't as simple as having an auditor come over some afternoon. In fact, an audit is the culmination of your yearlong process of gathering data and recording it. Auditors will remind you that the financial statements are the representations of management, not the auditor. The auditor doesn't prepare records directly but functions more like a coach or referee for your accounting staff.

In examining your books, auditors will understand and scrutinize your processes and systems, including internal controls-your rules about how finances in your school are administered. As you might expect from a person asked to attest to your integrity, auditors have firm notions about what constitutes good financial control. The good news is that these recommendations are based on years of history-the experience base of thousands of schools like yours. Auditors can help you gain wisdom that others learned the hard way. Good internal controls establish safeguards and avoid problems with operational effectiveness and efficiency, financial reporting reliability, and compliance with applicable laws and regulations.

Good internal control starts with the atmosphere you create as administrators, sometimes called the tone at the top. Having clear statements about integrity and ethics- statements that the board of directors has issued and the top administration has endorsed-is the foundation for good internal control.

Christian organizations, including schools, sometimes think that affirming the Bible is sufficient ethical teaching. Even though the Bible is the bedrock of Christian ethics, it is still helpful to develop a more specific ethical statement. Such a statement will cover issues such as conflicts of interest, acceptance of gifts, and hiring practices.

Although you've doubtless recruited board members who share your concern for your school's well-being, a majority of the board members should also be independent of the school management. So, for example, if the chairman of the board is related by blood or marriage to the school's principal, it can create the appearance of a conflict. Boards should also include someone considered a financial expert who can query, interpret for, and guide other board members regarding financial affairs. Such a person can head an audit committee-a board subgroup that takes on the responsibility of overseeing the school's financial affairs.

Having qualified board members in leadership sets the standard for the quality of personnel throughout your organization. The skill of your school's bookkeeper or accountant, as well as that person's watchful attention, is crucial to being able to present timely, relevant, and reliable financial statements that can be audited. Though auditors can reconstruct financial reports from chaotic data, the cost to do so is often prohibitive. Choose your bookkeeper and financial administrator with care because their data collection establishes the bedrock of the statements. Auditors review compiled data rather than create statements from your receipts and checkbook.

Your computer system is another important element. Though computer hardware and software can be exasperating at times, they help your bookkeeper organize, record, and look up transactions in an instant. In the hands of trained bookkeepers, good computer systems quickly recoup the investment they require.

Auditors will check how your organization is structured and match that to how your financial records are organized. They'll be interested in reviewing procedures issued to staff in areas such as purchasing and submitting expense accounts. To ensure that real checks and balances exist, auditors will examine whether financial duties are divided among staff.

Internal controls vary, depending on relative levels of risk. Auditors shouldn't and don't review every transaction. Instead, on the basis of their experience and assessment of your school's situation, they'll identify and focus on significant areas of risk in your financial system. They'll sample transactions and increase their scrutiny if they identify problems in any particular area.

Accounting principles include the notion that a legally enforceable promise to pay should be treated as if the money were spent when the promise was made. Therefore, auditors will ask about your financial commitments to others, as well as promises that others have made to pay you. Auditors will want to know what procedures are in place to authorize and control such promises. In business, promises are almost always written, but in Christian organizations many such promises to pay are oral, at least at first. Because oral promises are morally and often legally binding, it's important to know the extent of such agreements.

Your procedures have to be followed in order to be effective. Auditors will evaluate whether your internal controls are in place and working. To do so, auditors will examine your reconciliations and expenditure approvals. They will also verify the quality and frequency of the administration's review of financial performance.

Internal controls can be preventive (that is, in advance) or detective (that is, after the fact). Auditors will look for both types.

Even though computers can be labor-saving devices, they also create the possibility for a whole new level of sophisticated fraud. Therefore, auditors will ask questions about who has access to which programs and whether the programs require passwords. If the programs do require passwords, auditors will ask how often those passwords are changed. Computer-savvy people may be able to bypass the best safeguards, so computer programs have become one of the vulnerable areas in financial security.

Auditors will be interested to know that the channels of information and communication in the school are open in a number of different ways: between the staff and the board, between vendors and the administration, and between parents and employees, specifically between parents and the financial staff. You should be confident that the information generated is accurate, useful, and distributed to the appropriate people.

Verifying the accuracy of information is essential. Information generated internally-say, your checkbook balance-has to be compared with external sources such as your bank statement.

Ask yourself these questions about your school: Is information captured in a timely way? Do users of financial statements take time to discuss the information with the financial staff? If a staff member fails to follow established financial procedures, do we investigate and remedy the problem?

The controls you create must themselves be monitored. Like a discontinued fire alarm, if controls fail to work, they have no effect.

Is there an established procedure, known by the staff, whereby financial or procedural problems can be reported to high levels of authority? Does your audit committee meet regularly and record minutes of what it discussed? Do your auditors meet with the audit committee apart from the financial staff or the administration?

Finally, it is important to understand the limitations of an audit. Audited statements do not mean that a school is well run. A school depleting its reserves or paying too much for rent or salaries can still receive a favorable audit opinion. In extreme cases, when a financial crisis is likely, the auditor may issue a warning that the school might not be financial viable if certain trends continue. But auditors attest to the accuracy of records, not the wisdom of expenditures.

Regular audits are also not fraud investigations. Although an audit may detect many kinds of fraud, a normal audit is not likely to catch sophisticated frauds involving conspiracies of people who falsify documentation. Where fraud suspicions exist, a more thorough level of scrutiny must take place. You must communicate such suspicions to your auditors in order to ensure that they test for those possibilities.

Be sure to get the full value from your audit. Make sure your auditors generate a management letter-a confidential assessment of your financial procedures and internal controls that is based on their review of your records. Discuss these findings when your audit committee meets the auditors.

Having worked hard to develop parental ownership of your school, you must demonstrate your stewardship through finances of the highest quality. You can reciprocate the trust that parents have shown in you by hiring high-quality staff, creating accurate records, putting financial controls in place, publishing transparent financial statements, and having an audit attest to the accuracy of those statements.

It is required of stewards that they be found trustworthy. -1 Corinthians 4:2, ESV  

Bret Wichert, BS, CPA, is the partner-in-charge of the Colorado Springs and Denver offices of Capin Crouse in Colorado. He has over 14 years of experience serving exclusively nonprofit organizations. He is a member of the American Institute of Certified Public Accountants. 

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