Nonprofit Resources
Margin for Mission Podcast S1:E9 – From Confusion to Clarity: The Truth About Church Audits That No One Tells You – Transcript
Ken Tan:
Welcome to Margin For Mission: The CRI CapinCrouse Podcast, where two friends, Ken and Chris, bring you real talk about creating space for what matters most, because when your organization has financial and operational margin, you can focus on your mission with confidence.
Chris Purnell:
We’re professionals who’ve spent years helping churches, higher education institutions, and other mission-focused nonprofit organizations manage their accounting, tax, compliance, and other challenges. We understand the complexities you face, and we’re here to make it simpler.
Ken Tan:
In each episode, we’ll dive into practical insights on leadership, operations, and the everyday challenges of running a nonprofit without the jargon.
Chris Purnell:
And we’ll talk about life, too. Family, faith, quite a bit of football, and finding balance in a world that rarely slows down.
Ken Tan:
So whether you’re managing budgets, leading teams, or just trying to keep your mission moving forward, you’re in the right place.
Chris Purnell:
This is Margin For Mission. Let’s get started.
Ken Tan:
Well, welcome back to another episode of Margin For Mission. Chris, it is so good to see you, my friend.
Chris Purnell:
Likewise, Ken, always a pleasure to see you virtually. And hey, we’re coming off of a couple of days where we got to see each other in the flesh in reality, which is-
Ken Tan:
Can you believe it?
Chris Purnell:
… it’s a rare treat.
Ken Tan:
We actually exist in real life. We even did a fist bump just to make sure everyone knew. That’s not AI.
Chris Purnell:
I didn’t know if you were a 16-year-old kid in your parents’ basement or an 85-year-old guy in Russia. It’s good to know that you’re just a dude who’s rocking it out as a CPA. That’s awesome.
Ken Tan:
And I’m actually a lot taller than people think. It’s interesting, right?
Chris Purnell:
It’s true. I don’t have that problem.
Ken Tan:
Well, we also would love to introduce you all to one of our favorite colleagues here who does something that we are so grateful he does because we don’t have to do it. One of our fellow audit colleagues, Nathan Davis. Nathan, welcome to the show, my friend.
Nathan Davis:
Yeah. Thanks guys for having me on, and it’s great to be here. I know it’ll be a good time and looking forward to it.
Ken Tan:
Well, definitely glad you’re here. I guess, Chris, I guess I just need to admit that in my younger years, I, too, used to be an auditor, and there’s nothing against it. I am a recovering auditor. I think I just want to make sure as a part of this, if there’s any takeaway that our listeners have here is that auditors do have feelings, too, and they do care. And hey, this is part of what this is, this mission. And I jokingly say it, because especially on the audit side, it never gets a good rap. I think at the end of the day, sometimes you just feel like, “Oh, this is necessary just for the sake of it.”
And even for the most part, I remember even during my times, the way I was treated as an auditor, there were times where I remember when I was going to the client site and I wasn’t afforded the conference room. I was afforded the utility closet sometimes when I had to review my audits. Right? And it built character. It meant that I actually could use my iPhone flashlight as a lamp if I needed to. But you know what? Looking back, it’s one of those things that I was still grateful because I learned so much.
But you know what, Nathan, I would love to hear a little bit about you, my friend, your story and ultimately what brought you to CapinCrouse, too, as well.
Nathan Davis:
Yeah. Yeah. So I’m from Indianapolis, Indiana, and grew up there, went to school there, got to go to IUPUI at the time in Downtown Indianapolis, and met my lovely wife there and married her, and we have three kids. And shortly after graduation, I started with a firm on the north side of Indianapolis, and it’s been five years there in real estate, doing real estate audits, and I’ve experienced many of those times. I had one time that we went out to an apartment project to do the audit, and they put us in one of the vacant units upstairs, and they didn’t turn the heat on, and it was February, and it was 37 degrees in there that we worked in. So I get your stories of working in the dark. So I know what that’s like.
Ken Tan:
And you praise God for the invention of winter jackets.
Nathan Davis:
That’s right. We all-
Chris Purnell:
Get your gloves on.
Nathan Davis:
It’s very hard to type in gloves, let me tell you. That’s not an easy thing to do. But yeah, so after five years there, I decided to… I found CapinCrouse and found a firm that only serves Christian and religious nonprofits. And so I thought, hey, this is a great opportunity to come to the firm and get to serve those ministries and enjoyed the last, now, 10 years coming up here in May. So looking forward to it.
Chris Purnell:
Well, congratulations.
Ken Tan:
Yeah. And especially of course for you, since you’re in the state of Indiana, we got to drop off that little hint, right? Chris, one of the things we were talking about in previous week is the celebration. And Nathan, I know you’re just smirking because at the end of the day, I will say it for the folks here, you are an Ohio State fan, not an Indiana fan, but hey-
Chris Purnell:
Shame. It’s a real shame.
Ken Tan:
… there’s still celebration in Indiana, isn’t there?
Nathan Davis:
Yeah. I’m not sure an Ohio State fan there’s celebration or Purdue. I think they are all struggling.
Ken Tan:
Yeah.
Nathan Davis:
It’s challenging from time to time being not an IU fan during that run to the national championship game because they were pretty excited, but they’ve never had anything like this before. So I get it.
Chris Purnell:
Well, Nathan, to that point, there’s always room on the bandwagon, man. There’s plenty of space, just hop on. We’re taking newcomers.
Nathan Davis:
Yeah, yeah. You guys are definitely taking newcomers. I’ve noticed that over the last… Over that run, I noticed that there was plenty of newcomers jumping on the bandwagon.
Chris Purnell:
No one left in the way.
Nathan Davis:
People that used to say IU Basketball and Notre Dame Football, all of a sudden saying IU Basketball and Football.
Chris Purnell:
That’s right.
Ken Tan:
Well, we both know there’s more to life than just sports. There’s also audits, right? And I think that’s where part of it is there’s a higher calling and that’s where God called you was to be an auditor. But it’s just as I even think through it, CapinCrouse again, we love our auditors. I’m just going to preface that. And Chris and I are so grateful because as a team, we get to serve in so many different capacities.
Chris Purnell:
That’s right.
Ken Tan:
But a lot of times, there’s a misconception about audit as well, because there’s a lot of times, I think Chris, myself, even you, Nathan, you’ll get calls from churches and ministry saying, “Oh, we need to get an audit. We need to get an audit.” But then they actually don’t realize, or as we talk here, is like, “Well, actually I may not be what you’re looking for.” And so this is why part is, I know this may not be a conversation that’s talking about leadership on churches, but this is still just as pertinent because many of our churches are using this and needing this, right? But I think we need to get down to the basics. Right? And then this is where part of it, Nathan, that’s why we have you on here, because that’s what you do day in and day out.
And so I guess part of this is, tell us, what is an audit at the end of the day? What are some of the things about it that if you can think in layman’s terms for a ministry leader, what that is in particular?
Nathan Davis:
Yeah, absolutely. So I do, like you said, Ken, probably 10 to 15 times a year, answer calls from various churches of, “Hey, we need an audit.” And now that we feel like we’re at the size that we need to go through that. And as you dig through it, you start to explain to them what an audit is, that shifts. And so an audit is simply taking the financial statements and providing an opinion on them as to whether the financial statements themselves are materially correct based on reasonable assurance, right? Not absolute assurance, which is a key distinction, but a reasonable assurance as to whether the financial statements are materially correct.
And a lot of times, those people that come in asking for an audit are asking because they feel like they need to have somebody check their internal controls and their processes and their procedures, and they want to make sure that there’s nothing going wrong. And as we talk through that and they realize all the things that go into an audit and the price that comes with that, it becomes to the point where they’re like, “We need to look at other areas, more assessments of our internal controls because that’s truly what we need rather than going through the full financial statement audit,” because those assessments certainly help the church work towards that in the future.
Chris Purnell:
Yeah. Yeah. So Nathan, you’re using really plain English, which is super helpful, and as a person who struggles to use plain English, I really appreciate it. But one of the phrases you used a couple of times was internal controls, internal controls.
Nathan Davis:
Yep.
Chris Purnell:
Can you walk us through what that entails? What are you looking at when… Because that’s part of an audit, is to look at internal controls. It’s not the sum total of it. It’s not the whole thing. But what are you referencing with internal controls and what does that look like in a church context?
Nathan Davis:
Yeah, yeah, certainly. So for internal controls, we’re looking at all the controls around… For a church, for instance, when the money comes in on Sunday or during the week or online, all the controls that are in place to make sure that eventually it makes its way into the bank account, to the general ledger, into the donor system. Right? So all the controls that the church has in place to keep anybody from misappropriating those funds that would like to misappropriate them, making sure that when a donor gives money, it actually makes its way to its intended purpose. And so certainly, as a part of the audit, you look at that and make sure that that is something that is happening appropriately.
We also do that with cash disbursements to make sure when a church wants to write a check or needs to pay an invoice, that those are done appropriately, as well as online disbursements, ACH disbursements. And then finally, payroll, that’s the third main process that we look at to make sure that the controls around payroll, that the employees that are getting paid are getting paid the breaks that they should be getting paid, that there are no employees that what we would call ghost employees, employees that do not exist, that should not be getting paid. And so those types of things, making sure that there’s proper controls so that the church is… That there’s no opportunity for somebody to misappropriate funds.
Ken Tan:
You mentioned the part about ghost employees and things like that, and a lot of that ends up being on that forensic side that we had talked about in a previous episode because of the fact that unfortunately, fraud happens in churches more often than they’d like to realize. Right? I think there was a survey that talked about one in three church leaders have either experienced it or know that’s happened. And you get down to the basics that internal controls is extremely important more than what people realize in terms of just those checks and balances.
But I think that’s why even the conversations that we have, Nathan and Chris, I think when people have talked about, “Oh, we need an audit. We need an audit,” it’s because sometimes I think that misconception of what the audit is primarily they think that an audit means that they’re trying to look for wrongdoing in terms of like, “Oh, someone’s doing something wrong.” And that’s where actually some of these conversations end up switching to a forensic engagement or an assessment as to how we’re actually doing our controls, because again, we know that the term “audit” has that strong feeling of someone’s looking behind you and they’re digging deep. We know that at least as a part of this, there are some necessities to what we do.
And that’s where part of it is, the next question I have here is, there’s a lot of times church will come up to us and probably they think we are crazy because we sometimes talk to them and say, “I don’t think you need an audit.”
Nathan Davis:
Yeah.
Ken Tan:
And they’re like, “Don’t you want my business?” Or like-
Nathan Davis:
Don’t you want… Yeah.
Ken Tan:
Well-
Chris Purnell:
Turn away their money.
Ken Tan:
… I mean, yes, but… “All right. Here. Quiet and take my money. Right?” No.
Nathan Davis:
Yeah.
Ken Tan:
And that’s why I think I love what we do at our firm, because again, we’re not trying to sell that thing. We’re just trying to say, hey, what makes the most sense? And I think that’s where some of the conversations, Nathan, you and I have been on so many conversations with small churches to massive churches on these conversations where they initially say, “Oh, we need an audit. We need an audit.” After you talk through it, you actually say, “Well, maybe not.” And so I guess this is for you, Nathan, especially going through and… Did churches and nonprofits need an audit?
Nathan Davis:
Yeah, there was definitely sometimes where a church and a nonprofit would need an audit. A lot of times, they start with a lender that has a requirement for either an audit or some sort of level of a test service, whether that be a review or a compilation. We do several of those. There could be denominational requirements, right? So some of those mainline denominations will have requirements for audits periodically or every year. There could be that they’re a member of the ECFA or a similar body. They will require a level of a test, whether that be an audit or review based on your revenue numbers, your board, your articles of corporation as part of board governance, those bylaws, those could all require audits from time to time.
So there’s a lot of various reasons why a church would go through an audit, and certainly some of the larger churches do it annually, certainly as a best practice. But as you get into some of those smaller and mid-sized churches, that’s where we talk about some other alternative options to kind of help talk them through as here’s what we would do. If I was a member, if I woke up tomorrow and I was one of your elders for your church that is three or $4 million, would I go through internal audit process? The answer to that’s probably going to be no. But here are some things that we can do to get you to the same point at a much cheaper price in less time, but answer those same questions because the audit industry itself, there’s a lot of regulations and a lot of things that we have to do to issue opinion that, unless you need an opinion, may not be overly valuable.
Chris Purnell:
Yeah. Yeah. It’s a really good distinction in the world where you might need an audit because of an external authority that’s over you that really wants you to have this audit or requires you to have the audit, whether it’s a lender. When I was a nonprofit leader, it was the United Way that required us to have some kind of audited financial statements. And so we did that. Yeah, just as part of that normal, hey, we care about transparency. If you’re going to be an organization that has our… The way that our board members put it, because they’re people of a certain age, the good housekeeping seal of approval, that means anything to anybody, but to have that seal of approval, they really want us to have the financial statement audit. So that makes sense.
But it sounds like there are some churches that come to you, Nathan, that want an audit. And what are some of the reasons that they say they want an audit? We’ve covered the internal controls element, but are there other reasons why a church might want an audit? Kind of give us some of those reasons.
Nathan Davis:
Well, one of the reasons they say that we try and help them understand that’s not what an audit does is they want to prevent fraud. Right? And I’m sure on some of your previous discussions, you talked about the low likelihood, and Ken, you may know the percentage. I think it’s four or 5% of fraud is actually discovered from an audit. And once they realize that that’s not going to help uncover or prevent fraud, they quickly turn away from that. So that’s part of our education of this is not a fraud-prevention technique to have the annual audit.
Ken Tan:
Yeah. And typically, what’s interesting for them is they start to realize, like you said, it’s not the external audit that finds it. It’s typically a tip or someone internally that is sharing something that’s a concern, and ultimately it opens up and then they call and say, “We want a forensic audit.” And we’re like, “Well, hold on. Let’s step back for a second. It’s not an audit [inaudible 00:16:14] examination.” And you start getting to the lingo, but ultimately, they want answers at the end of the day.
Chris Purnell:
Yeah.
Nathan Davis:
Yeah.
Ken Tan:
I feel like that’s what’s ending up happening whenever they’re asking for an audit. They want answers to some of the questions they’re seeing. They’re like, “Is there wrongdoing?” Right?
Nathan Davis:
Yeah.
Ken Tan:
If that’s the case, then most likely, they’ve seen something and are trying to find experts that know it and they may go to the forensic route or they say, “We want answers as to, are we still operating how we need to from an efficiency perspective?” And they think that’s the audit, but then it’s actually the assessment piece.
Nathan Davis:
Yeah, yeah.
Ken Tan:
Or they’re saying, “Hey, we want answers that our financials are clean.” Then you’re like, “Okay, we’re getting the right direction now for an audit.” But-
Nathan Davis:
Yeah. Yeah. And when they have those questions about we want to make sure that our processes are good, I talked them through. If we can test the processes and make sure that the processes are good, if the inputs are good, the output of your internal financials are going to be good. Right?
Ken Tan:
Yep.
Nathan Davis:
And if we’ve audited the inputs and made sure that the team knows what they’re doing, that the controls are in place, the reporting is going to be appropriate. And then you can start to trust the internal reporting from the board’s perspective because you know that you’ve had the auditors come in and test the inputs.
Ken Tan:
Yeah.
Chris Purnell:
Well, that’s a really good place to kind of jump off into what are some of the benefits of doing an audit? I remember we used to put the audited financial statements on our website.
Nathan Davis:
Yeah.
Chris Purnell:
I’m assuming that they were downloaded singles of times over the years. Who knows how many people actually look through those. But can you give us a sense for what are the actual concrete benefits to having audited financial statements for the different constituencies that the nonprofits interact with?
Nathan Davis:
Yeah. Yeah. So if you think about a nonprofit, there are several external interested parties that, depending on your size and who you interact with, would be very beneficial to having an audit. So those are going to be things like your lenders and your bankers that need it. Certainly, if you start to get into the grant world, if you’re going after any grant that is of significance, those are likely going to be ones that are going to want an audit so that they can make sure that you’re above reproach when it comes to the funds that you’re using, that you’re using their funds appropriately.
Another one would be is if you’re doing a lot of external fundraising, right? So churches don’t have to do that as much, but if you’re a mission organization or a local parachurch ministry or just a local nonprofit that’s having to do a lot of fundraising, having that GuideStar seal of approval, using the ECFA, you’re going to want to make sure that you have an audited financial statements to be able to get those types of approvals and then be able to show your donors, especially your larger donors, that you are having that external audit because the larger the donors, likely the more sophisticated they are and the more familiar they are with an audit. And so those things are going to be very, very helpful to them.
And then of course, any regulatory agencies, as you start to think about the higher ed world, those obviously, if you’re getting federal funding, are going to have to go through the audit process. To continue to ensure that you get that federal funding, you have to go through an audit, which makes it obviously extremely valuable to them as well.
And so there are several good, good reasons to go through that audit process and just making sure that this is what we need is part of our job as the external trusted advisor, which is what we want to be for our clients, to make sure that we’re providing them the correct level of service for what they need. So whenever we go into these conversations from the front end, it’s assessing the situation, making sure, “Hey, okay, you want an audit? Let’s talk through why and making sure that you do need it, and then let’s work through that process.”
Ken Tan:
Yeah. Well, I know you just mentioned different levels of service. And this is something where, especially when we have these conversations, typically, I’m sure a lot of them are used to, when they say they need an audit, someone already talks through what needs to be done then and all that.
Nathan Davis:
Right.
Ken Tan:
But then we’re actually talking through those different levels of saying, “Hey, a full audit may not be right for you.” But then this is where part of it is, I know we see this day in and day out, but there’s actually different levels to it. Right? There’s a compilation, then there’s a review, then there’s also an audit, and that all goes under that attest wing. And that’s where I know the definition, I know Chris does, but I think for a lot of our viewers and even listeners, they probably heard of it, but they don’t know what the differences are between that. So Nathan, you mind sharing a little about what those three are?
Nathan Davis:
Yeah. So we talked through what the audit is. The next level down is a review, a financial statement review. And so that is simply inquiry and analytical procedures over the ending balances themselves to make sure that they are correct as best as we know. There’s no… Before, we were applying reasonable assurance. Well, this is considered a negative assurance. And so there’s not a significant detailed testing, you’re not vouching things as part of that. Those are usually done for organizations that may have an external need for that from their lender. We do a lot of those where the lenders are requiring annual reviews. And then the ECFA, if they’re a member, they hit the right revenue totals, ECFA requires a review, and so we do it for them, too. Those are primarily the ones that we’re doing that for.
And then a compilation is below that, and that’s just taking the numbers that they’re giving to us and putting them into a very readable financial statement format or compiling them into a financial statement format and then providing that to the client. And usually, that is done simply because the lender wants it in a format that is very consistent and comparable with all of their other clients that the bank may have. And then there are some that do it because it’s very helpful when preparing a 990 to have that compilation as a part of that. So some of those smaller nonprofits that have to do a 990 will do both the compilation and the 990 just to make it easier for the client. It gives them a financial statement. It’s not a ton of investment. And then it helps immensely with the 990 preparation to start with a finalized compilation. So-
Chris Purnell:
Nathan, you-
Nathan Davis:
… the great thing about those… Oh yeah, go ahead. Well, I was just going to add that you don’t have to be independent for those either. That’s a big difference between the other two is there’s no requirement for compilation to be independent.
Chris Purnell:
And when you talk about independence, just to kind of double click on that, that means that we could do other services for them, not just the review, not just the compilation, but we could provide some consultative services and guide them through some various things.
I had kind of a random question pop off in my mind. What about agreed-upon procedures? Where does that kind of live in this whole audit, review, compilation discussion? And like Michael Scott said, explain it to me like I’m a five-year-old, like I don’t know anything. So what are agreed-upon procedures? How does that work in this context?
Nathan Davis:
Yeah. Yeah. Michael Scott might need a three-year-old to help him to understand this at that level. No, the agreed-upon procedures engagement, so that is usually done when you’re not required to have an audit and you want to have somebody come in and just look at your procedures and we’ll say, “Let’s test 15 cash disbursements this year and how many of those included approval before they went out the door.” Right? So that’s what I would say. A comment I made earlier about how, sometimes, you get to these and you’re like, “Well, you don’t really need an audit, but we want to check the processes and procedures. We might do an internal control assessment.” And then an annual check of that would be, let’s do these AUP engagements to make sure that the client is continuing to follow those internal control processes that we set.
And usually, that’s board-driven of we want to check, we’re going to sample 15 disbursements during the year, we’re going to sample three bank reconciliations to make sure they were reviewed. And those are helpful in those scenarios because the staff know every year, we’re going to go through this AUP. That’s kind of our check to make sure we’re following our procedures. Right? It helps the staff not get lazy and start bypassing procedures once they’re set and we know that they’re good. So a lot of times, especially with some of our church clients, we’ll do those AUP or you might hear them referred to as internal control monitoring procedures. That’s another term that I come across from time to time. It means the same thing. They’re done under an AUP arrangement, but it’s trying to… We’re kind of the outsource internal auditor.
Ken Tan:
Okay. I love that. And so as you can tell, there’s so many different ways that you can help serve a church or a ministry in different capacity, especially on we call it the attest side.
Nathan Davis:
Yeah.
Ken Tan:
But there’s a lot of times that we’re also still dealing with a church that may actually be needing an audit, not immediately, but part of the things is just even talking about… I think I’ve loved how you’ve approached it with a lot of the churches that we’ve been talking to recently about, hey, there’s actually a way to get into this gradually instead of jumping deep into it because there’s a lot of times those first year audits can be pretty… I’m not going to say traumatizing in this case. It can be very eye-opening in terms of, wow, okay, I thought we were ready. This was actually a very different experience.
And so Nathan, walk through what are some of the things you’ve told some of these churches and say, “Hey, we do agree you are in line for getting an audit, but maybe not immediately.” What are some things you’ve done and talked through them?
Nathan Davis:
Yeah. So some of it is assessing why do we think that we need an audit? And a lot of times, I get those when a church may be getting close to a building campaign and it’s, “Hey, we think we’re starting to talk to the lenders,” or “We’re going to start talk to lenders. We’re starting that capital campaign process and we’re going to need some debt. And with the debt, we think we’re going to need an audit.” And if they say, “Hey, that’s probably two to three years away,” we may start with that church assessment now to assess those internal controls the very first year, kind of a stair-step approach, and then the next year, move up to a financial statement review. So now, we’ve done an assessment where they’ve been able to see what they need from an internal controls perspective, make some changes and corrections. We’ve done the review so that we can look at the financials and start to pull those together. And then the third year, you put it all together and do an audit that third year.
That helps a lot, but then to get their controls in place so that the control piece of the financial statement audit is not so painful. And then on the review side, they’ve already started to pull some of those schedules together. Right?
Ken Tan:
Yeah.
Nathan Davis:
It’s kind of like, we’re going to take a third of the step the first year, another third of the step the second year, and then the full third step the last year instead of trying to jump three steps at one time-
Chris Purnell:
Kind of increment.
Nathan Davis:
… and hurt yourself.
Ken Tan:
Yeah. Well, I even think about this, especially when it comes to the audit and the misconceptions that come in here. This may be a little bit of a curveball, but I know especially when it comes to churches and businesses as well, when there’s something that happens at that church, for some reason, they always be like, “Why didn’t the auditors catch it?” And I know this is where part of it is, I know Nathan, you’re laughing because again, this is not even pertaining to CapinCrouse, but even when I was in the public accounting world for public companies, when there was, let’s say, a scandal or something intriguing, they’d be like, “Oh, they reached out to their auditors.” And you’re like, “I don’t know if the auditors were actually supposed to be involved in that piece.” But that’s where part of it is, I don’t know, Nathan, have you ever seen those types of things where for some reason, even those types of things, they think the auditors are involved in that? And I’m hoping us to dispel that misconception, too.
Nathan Davis:
For sure. Yeah. I definitely had instances where they come to us and they say, “We have cashflow issues. Shouldn’t you guys have known that?” I’m like-
Ken Tan:
Oh, come on, you look at it once a year, good to go.
Nathan Davis:
Yeah. Did you look at the financials we gave you last year? It’s pretty clear that there’s cashflow issues and someone was overspending, and “Shouldn’t you tell us?” I’m like, “Well, you were operating in the red for several years. It’s pretty obvious that there was overspending.” And so then it’s just pointing them back to, look, the audit opinion tells you right here, this is about providing reasonable assurance, not about analyzing the numbers. We’re just telling you the numbers that you gave us, are we reasonably sure that they are materially correct? That is what we’re trying to get to you. We’re not trying to find fraud. We’re not trying to tell you how to run your business or make an adjustments to the numbers and make them look better. We’re just trying to tell you if the numbers that you gave us, are they materially correct?
Chris Purnell:
That’s such a key distinction. And it kind of makes me think about human relationships more generally where you got to define the relationship. What are we?
Ken Tan:
Yeah.
Chris Purnell:
When my wife Christie and I, we were walking around and talking all the time and then eventually, it just got to the point where we were like, “Hey, what exactly is this?”
Nathan Davis:
Yeah, yeah.
Chris Purnell:
And I was like, “Well, can we just keep it casual?” I’m just kidding. I was like, “I really like you. Let’s start dating.”
Ken Tan:
You’re recorded now, Chris. No going back.
Nathan Davis:
One thing that we need to have, maybe as a part of high school graduation, when I took the CPA exam, Ken, this is probably the case for you, when I went through the review course, they told us, “Look, one of your audit sections that you’re going to have to do, you’re just going to have to write an unmodified clean opinion. They’re going to give you a blank sheet of paper and that’s going to be what you’re going to have to do.” So maybe as a part of high school, that should be a requirement for everyone to graduate high school is just memorize the unmodified opinion to be able to recite it, write it word for word because to pass the CPA exam back in the day, that was a mandatory thing.
Chris Purnell:
Gosh. That was a difficult time.
Ken Tan:
Man, you’re giving me bad nightmares from when I… I’m really glad I got through all of them on the first try, but just that sixth month was a blur of just writing down notes. And I’m really glad I got it. I got it done. I think about a funny story, and my friend’s going to kill me. So when we were studying through for the exam, I remember we were deep into busy season and my friend just came up to me, he goes, “Hey, bro, I’m going to admit you something.” I said, “What’s up, man?” He goes, “I failed the audit part of the banker or the CPA exam.” I’m like, “Bro, you and I are auditors.” I think it was… Was it like a 74? So for those that don’t know, when it comes to the exam, you need a 75. I’m like, “Maybe you got a 74.” He goes, “No, I was closer to the 50s.” I’m like, “Hey, we’re going to keep that between you and me and now everyone on this podcast.” But it’s been years. But you laugh and it’s like the whole thing is there’s so much memorization, but now, there’s a lot more personalization to what we have to do.
Chris Purnell:
Yeah.
Ken Tan:
That’s the reason that’s so different.
Chris Purnell:
Yeah.
Ken Tan:
I know it’s a standard for, hey, as CPAs, even churches look for people saying, “Oh, we want a CPA,” but they don’t understand what it means. I think for us, it’s essentially saying we want to make sure we can grasp the concepts, but then apply it, because especially what you do, Nathan, when I think about from the audit side, one of the things that I think is so awesome that we do here is that for a lot of our audit clients, you’re also factoring… And this is not meant to be a plug, but the Church Financial Health Index is a conversation on those metrics because they are able to see how they’re doing compared to fellow peer churches, which is something that’s just an added thing that we do as a part to show, look, this is why we do what we do and we want to show you how you also do compared to your peers. Right? And I think that’s something that I feel like is an amazing thing that we can do for our clients that still doesn’t impact how we do our audits and all, but just adds to the extra thing of like, “Hey, this is why we are for you.” And I just was wanting to make sure they knew about that, too. I don’t know if you want to share anything on that piece too, Nathan.
Nathan Davis:
Yeah. Yeah. Honestly, when I could do a 30-minute audit committee or finance committee presentation at the end of a church audit, 20 minutes of those 30 are spent on the Church Financial Health Index. And we spend all this time, we spend all of our hours working on the audits and I spend about two hours pulling together the presentation and running the ratios and doing the graphs, and that’s where they want to spend all their time on, compared to the hours and hours the team puts into the audit because that’s where the real value is. Right? That’s where they can take the numbers, we can analyze the numbers and do that extra step of saying, “Okay, here’s how your day’s cash flow ratio is compared to others of your similar size, complexity, giving? How are you doing compared to them? What do we then start to brainstorm, is this a number we’re happy with? If it’s not enough, let’s look at some other ratios and start to take everything as a whole.” It’s important with those to not take one or two and make big decisions on them to look at all of the 19 or 20 ratios and make sure that we are looking at it holistically and making sure that we’re moving in the direction that we want to move and how are our KPIs looking compared to others.
Chris Purnell:
And I think that gets to the point that you were talking about earlier, what are boards, what are leaders expecting to see in an audit versus what they actually get in an audit? But just kind of using the CFHI, the Church Financial Health Index and other ratios and other comparable churches, they can see, “Hey, this is kind of how we stack up. This is how we can compare ourselves to like organizations.” And I think that that’s super helpful. You’re right.
Nathan Davis:
Yep. As well as best practice benchmarks, we include those as well. Just because maybe everyone else is doing way above the benchmark, but as long as you’re hitting the benchmark, we don’t need to try and compare ourselves against everyone else as long as we’re doing what we need to be doing sometimes. Sometimes, that’s all that matters is looking at the industry benchmarks as well.
Ken Tan:
Well, even just talking about just audits in general, I think about back in my audit days, kind of just recollecting, reminiscing, I guess is how I call it. I used to be like, oh, I was like, “Why these people don’t seem to like me so much?” And I’m like, “Hey, I’m here. I’m just trying to help get this stuff done.” But it wasn’t until I actually switched to the other side when I realized, oh, these auditors ask a lot of questions.
Nathan Davis:
A lot of questions.
Ken Tan:
And again, this is where part of it’s like, I get that’s what you did. It allowed me to have a greater appreciation, especially that first year going from being on the audit side to being the audited side. And I was like, “Okay, this is a learning lesson.” But again, it went smoothly and all because of some of the concepts I’ve learned, but this is where part of it is like for a lot of these churches, they just even talk about how can we even get ready for this so it’s less painful, especially that first year. What are some of the things you think, Nathan, could be helpful for them to know?
Nathan Davis:
Yeah. Probably the biggest issue that we run into with churches comes to their fixed assets and that’s something to start to think about as… Especially an older church that hasn’t been through an audit before, those fixed assets, as you guys know, have to be recorded at historical cost. And if it is a older building, we’re not going to have records for those. Right?
Ken Tan:
Yeah.
Nathan Davis:
So it’s just kind of starting to pull together that fixed asset ledger to make sure that let’s see what we have, what can we get, and what do we not have? And are we going to have to either try and find those documents, or is this a situation where we’re just going to have to take a modified opinion? And honestly, that is not uncommon for those older churches that maybe haven’t been audited before, and that’s not something that’s unexpected. Especially if you go to a lender out there that does some church lending, they understand that, and they’re going to get their own appraisal because they’re not really concerned about historical costs. They want to know what is it worth today.
And so they don’t get beat up about that. So especially third parties, the ECFA, they understand that. Right? I mean, it’s not an uncommon thing for churches to have that issue. And so if that’s the case for a church, I would not get bent out of shape or let that hold you back from getting an auditor, pursuing this, if that’s something that would be helpful to you because it’s something that could certainly be worked through and we work through it all the time.
Chris Purnell:
Yeah. You dove into the fixed assets as a potential issue that may come up during an audit, but I was curious if we could zoom out for just a second and you could give us kind of a high-level overview of what the audit process looks like, what’s the flow look like for those who haven’t been through an audit, kind of giving them a sense for what to kind of expect should they [inaudible 00:38:39]?
Nathan Davis:
Yeah. Yes. Yeah. Yeah. So as you kind of think about what the process is, once you start the initial discussion with us and we start to get the engagement letter signed and everything, is when you start looking at the assessment, that internal control phase. Right? And so you start looking at, okay, we need to start to pull together. This is probably the second-biggest issue that we find is pulling together the narratives of those processes, right? Because a lot of times, the accounting department or the controller at the church or any organization may just… They inherently know in their head, here’s the process, but nobody’s ever written it down and formalized that. And so starting to pull those together would be helpful because that’s one of the first things that’s going to be on that very initial prep list that we’re going to ask for is the narratives for your key processes.
And so the three we talked about earlier, those are going to be the ones we’re going to ask for. And then a lot of other organizational documents, right? That’s going to be something that we want to memorialize a lot of the… We’re going to want all the agreements, all of the organizational documents, all those types of things starting to pull together. And again, most organizations, churches and other nonprofits have all that. We just got to get together in one place. Right? And so starting to have comb through files and finding those, that’s probably the third most inclusive time-consuming thing for an audit is to start to pull those together because that’s also going to be on the initial prep list.
And then there’s just several checklists and just questionnaires. So the very first time you go through it, it feels like you’re just going through and answering questionnaire after questionnaire after questionnaire just because it’s not been done before. And so a lot of things that… And all of our jobs are like that. There’s a lot of things, the information that live in certain people’s heads that aren’t written down. And going to the audit forces you to write a lot of your accounting practices and policies down and getting them memorialized. And that could be another benefit of going through this process or just a church assessment process is you start to memorialize a lot of your processes and your procedures so that you have that in case something were to ever happen, start to get into that succession plan for the accounting department. Right? And so getting a lot of that down starts the process off of that first phase of the assessment.
Ken Tan:
You brought up essentially how I’ve at least seen it is whenever an audit happens, to an extent, some of the benefits are is a fresh set of eyes that are looking at processes and saying, “Hey, this has been going on for a while.” And it allows you to think about it even on the inside. I think about this, and Nathan would love to get your thoughts on your tips, but even when I was on the other side, the one being audited, one of the things I had tried to approach it with my team was saying, “Hey, let’s not be combative with the auditors. Let’s be collaborative or cooperative.” And that’s where part of it saying is if we don’t know the answer, let’s not push back and get angry because we don’t know the answer, but let’s just say, “Hey, we don’t know, but we’ll figure it out together.”
Because I remember even on the audit side, whenever I had to deal with clients that were pushing back, that were causing issues, on the audit side, it actually caused you to want to ask more questions, exercise that professional skepticism. So it actually ends up going down a slippery slope of just it doesn’t get better. It’s easier or, at least, a lot smoother just to admit, “Hey, we don’t know the answer, but we’ll try to figure it out together.” And if, of course, you, as auditors, may say something or write something on it, at least you’re going that approach, which hopefully makes the audit smoother versus you’re pushing back, it gets way more combative, no one’s happy at the end of the day, and it just ruins over relationship. I don’t know, what are some other tips you may think of, Nathan?
Nathan Davis:
Yeah. And I think that’s one of the great things about this assessment phase of the audit, is you’re thinking about, well, we’ve always done it this way for the last 10 years, why? And maybe we could do better. And then the auditors also, especially for us, because we exclusively do evangelical nonprofits, we have the opportunity to provide tons of best practice recommendations for, one, closing any opportunities, loopholes, gaps that may surface, but two, what efficiencies can we help you gain through improving your process? Right?
And so as you start to memorialize a lot of your processes and going through the audit, that’s one of the biggest takeaways for organizations that have not been audited before or very early on in the audit process is they get a management letter, which is one of the two deliverables at the end, detailing out all of our findings through that first phase to make sure that we are communicating those to you on what holes we see, as well as just general best practice efficiencies that you may be able to have.
And then maybe the other thing would be some missing policies. There’s a lot of… As the world continues to change, 10 years ago, no one would’ve ever thought about having to do a crypto policy, but that’s certainly a thing now. And so those types of things that we can help talk through and provide some best practice examples and things on is part of that phase of the audit.
Ken Tan:
Well, I know for me, and this is where I want to at least preface this as we start to land the plane in this case, is emphasizing that auditors do have feelings, we do have personalities and all. And I know I’ve seen this, at least, Nathan, adding across, not to joke about this, but I think our firm, the audit side as well, does a lot on community service. We’ve done a number of things of being out there for the community. Sometimes, auditors like to have fun. I’ll share a story of what happened at my old firm later. But Nathan, I’d love to hear some of the things that you all do even outside because again, audits, it is part of our profession, but there’s more to us as well. And that’s one of the things I want to make sure that we’re able to highlight in this case is beyond the ledger, there are some additional things that y’all love to do.
Nathan Davis:
Yeah. Yeah. So certainly as a firm, we love to do community service days and do everything we can to help our clients out and participate with them and help them. For us, not only does it get us outside of the office, but it gets us to see the impact our clients are making in the community. Right? And it’s just a joy to get to see those things and get to experience that right alongside our clients because it helps remind us why we’re at the firm and why we do what we do. Right?
Everybody who comes to work at CapinCrouse is here because they love the mission and they love the clients. And sometimes in the busyness of life, the busyness of serving clients and getting deadlines and getting things done, we can forget that. And so those opportunities that we go out and interact with our clients and help them do the work, serve the communities they are, they’re doing that, or even just… I was at one a couple weeks ago and they had a brand new warehouse, a meal pack facility. Getting to go through that and see all that they… Taking the tour and seeing all that they’re doing now and the additional meals that they’re able to pack for underserved children across the world, that reminds me of why we do what we do in helping them be better so that they can serve more.
Chris Purnell:
Yeah. Yeah. And the hope would be that that actually happens that way, right? That they view the audit moment as a tool to help them, yes, be more compliant and, yes, pursue best practices, but ultimately to help augment their mission and to help them focus on mission attainment, lives being changed, depending on the nature of the organization, the Gospel being proclaimed around the world, the church continuing to do its work, universities and colleges continue to educate and all that kind of stuff.
And I will say, as a person who was on the other side of the table with auditors when I was a nonprofit leader, I’m not going to say we put them in the closet, but man, pretty close, pretty close. It was a dingy basement. But it always felt like, gosh, I’m glad they’re here, but I’m also glad when they’re gone. So it’s this weird push before you. But now being on this side, just serving for the last six years with some really wonderful people, like Nathan Davis, and seeing the way that they approach the audit work that they do want to see that it benefits the clients, it’s not just meant to be a root canal or fill in the blank super invasive medical procedure, but it’s meant to be something that’s very helpful. I can attest to the fact that that’s true.
Ken Tan:
Oh, yeah. I’ll tell you, Chris, so I remember one of my colleagues, he was on an engagement where the client was one of the plumbing companies and they didn’t have any available boardrooms, unfortunately, so they got to use it. It was an empty wing, but the bathroom, empty wing, literally their table was a setup collapsible table and they were around… They didn’t have full digital cameras at the time, but they have some photo evidence of showing that that was their setup for a time.
Chris Purnell:
Oh, my God.
Ken Tan:
I guess this is where part of it is, we’re people. At the end of the day, we’d like to have a good time.
Chris Purnell:
That’s right.
Ken Tan:
I’m sure this isn’t happening anymore.
Nathan Davis:
Never.
Ken Tan:
I can say this, I’m going to say this under the guise of anonymity because it wasn’t my engagement, but I remember from my own colleagues as well, there used to be some little… It was a lighthearted prank that was done in the audit side for the audit interns. And actually the client was involved in this. And so it was a client where the office building had an atrium, like the middle opening, like when you go in Embassy Suites kind of thing where it’s open-in-the-middle hotel kind of thing, but in the middle, it’s like a little pond.
And I remember how they shared the story with me was that they’re saying, “Hey, we’re doing inventories here, but what’s important about this inventory is actually one of our highest dollar values are these fish. There’s these golden koi in this pond and we need to make sure that the number of golden koi that we have in there counts to the same number that we have on this ledger, on this book.” And so they made the interns put on those little… You know the waiters and with a net. And at that time, the people at the client knew what was happening because they were all hanging outside on the railings, watching these three interns trying to get these fish and recording it on their clipboard that, “Hey, this golden koi does exist.” Right?
And that’s where part of it’s, again, we like to have fun, too. That’s where I think I always look around, I laugh on it because it was a time where I hear that, “There’s no way,” but it actually happened. And it’s like, I don’t know if it’s going to happen anymore, but that’s where part of it’s saying we are all human, where we interact with people and auditors and like that. I think at the end of they day, people was like, auditors, only they’re just a snoop and scoop, but really at the end of the day, we’re trying to help support a mission even at a different capacity. And that’s one of the things I want to emphasize as a part of what this conversation was and why we wanted you on here too, Nathan.
Nathan Davis:
Well, I think one of the things I’ve noticed over the years coming to CapinCrouse, first is working in real estate like I did before, it is like that. Those real estate firms, we were there to provide a compliance-based service, and there was no relationship building. They had to get the service to continue on with their federal funding, and that’s all it was. And they didn’t care if we were there till midnight working. They just, “Do your job and leave us alone.” Right? Whereas working with our current clients in the faith-based space, there is a partnership. Right?
Ken Tan:
Yep.
Nathan Davis:
We are much more of a trusted advisor to help them through and navigate issues rather than a compliance specialist. And it’s just so enjoyable and I’m grateful to know that we are able to have those relationships with our clients rather than we’re just here to bang out another HUD audit.
Chris Purnell:
That’s right. That’s right. And like the Word says, it takes a full body with arms and legs and eyes and ears working together. And so while Ken, man, he sounds like auditing was not his jam. He was not-
Ken Tan:
It did not spark joy.
Chris Purnell:
It did not spark joy.
Ken Tan:
I guess I always [inaudible 00:51:13] did not spark… I could run a mean audit, but it just did not spark joy. And I’m glad that it does for Nathan.
Chris Purnell:
That’s right. That’s right. It takes all kinds to make sure that this body functions healthy and moves forward in a sound and healthy manner.
Nathan Davis:
Well, Ken must never have had the magical experience of the statement of cash flows and bringing back to the balance sheet. That’s quite one of my favorite things. It was like-
Ken Tan:
That was the second favorite day of his life, second after his children being born. That’s second. Right, Nathan?
Chris Purnell:
Wedding day. Yeah, birthdays.
Ken Tan:
Third favorite.
Nathan Davis:
I hate to tell you this, Ken, I’m not sure Brandy’s on the podcast yet. So I think we’re okay that you said that.
Chris Purnell:
Okay. You’re safe. All right.
Ken Tan:
I’ll stand my case.
Chris Purnell:
Now, watch. This will be the one that she turns on for the first one.
Nathan Davis:
Yeah.
Ken Tan:
Well, awesome. Nathan, we’re so glad you’re on this as well. And I’m sure we’ll have some further episodes that we’d love to have you back on. And again, this is where part of it is it’s been amazing as with the line of our different speakers we have both internal and soon to be a number of external ones, is just seeing how much we get to interact and the honor we get to interact with such amazing people, their stories, and why they do what they do. And so again, we are so grateful you’re here, Nathan. Appreciate that you’re here and joined us.
Nathan Davis:
Yeah. Honored and appreciate to get to join you guys. And I’m sure it’s been a joy and I hope to do it again.
Ken Tan:
Absolutely. Awesome. Well, hey, we appreciate you, Nathan. Chris, we’ll catch you soon, my friend.
Chris Purnell:
Sounds good, man.
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