Updated response to the September 27, 2006 letter addressed to the OCA Audit Committee elected at the 14th All-American Council released
The firm of Lambrides, Lamos and Moulthrop LLP was engaged in January 2006 by The Orthodox Church in America, to perform an independent audit of the Church’s financial records for 2004 and 2005.
For numerous reasons - particularly the lack of adequate documentation to support many significant transactions in 2004 and 2005 - the Church was not able to prepare financial statements in accordance with generally accepted accounting principles. Due to the lack of supporting documentation for significant transactions recorded in the general ledger, the auditing firm determined that they could not render an opinion for those years.
During their work related to the audit of the 2004 financial records and systems, however, they did identify areas of weakness in the administrative and accounting practices of the Church. They noted this in a letter dated September 27, 2006 and addressed to the OCA Audit Committee.
As an integral part of their audit of the OCA financial records for 2006, they requested an updated status report on the items raised in their letter of September 27, 2006.
The text of the status report as of July 2007 is offered in response to the 32 observations and recommendations contained in their letter to the OCA Audit Committee.
The following response reflects input from the following Church members who have been working individually and collectively in an intensive effort to address issues of organization, management, policies and procedures: Protodeacon Peter Danilchick, Best Practices committee member; Deacon John Zarras, organizational task force committee member and transition officer; Robert Kornafel, chairperson, organizational task force and Best Practices committee member; Al and Carol Wetmore, organizational task force committee members; Mary Caetta, chairperson, Metropolitan Council audit committee; the Very Rev. Matthew Tate, chairperson, Metropolitan Council finance committee; and the Very Rev. Paul Suda, chairperson, OCA audit committee. In addition, the opportunity was extended to all members of the Metropolitan Council and Holy Synod to provide input to this report prior to its finalization. Comments and suggestions received from the Council and Synod are incorporated.
With actions started by the Metropolitan and Acting-Treasurer even before issuance of the September 2006 letter, the OCA has been intensively engaged in a wide spectrum of activities in an effort to address the problems identified in the letter, to develop and implement systemic corrections as necessary, and to address issues of past malfeasance.
In general, with regard to the 32 observations and recommendations contained in the letter, four major activities within the Church have taken place or are in process of being implemented:
- The Church’s governing bodies have adopted a comprehensive set of policies, “Best Practices Principles and Policies for Financial Accountability.” These policies include specific processes related to conflict of interest, whistle blowing, and document retention. In addition to adopting these policies, the Metropolitan Council has also established and staffed ethics and internal audit committees.
- An organizational task force, chartered by His Beatitude, Metropolitan Herman, on September 8, 2006, has studied the distribution of work and responsibility within the central administrative body of the Church, and has made recommendations to improve accountability, establish a balanced work load, establish a rational basis for employee pay, and provide for checks and balances within the overall organizational structure. The Holy Synod and Metropolitan Council approved their recommendations in December 2006. The majority of actions required for implementation have been completed.
- The Church is in the process of upgrading its financial accounting and reporting system with the acquisition of Blackbaud Financial Edge, the general ledger recording and reporting system software, and Raisers Edge, the fund-raising and development management system software. Migration of existing financial information to the new software began at the end of the first quarter of 2007. Training of finance department and systems technology employees has continued through the second quarter of 2007. Full implementation of the new accounting software and complete migration is projected to occur during the third quarter of 2007. Implementation of Blackbaud Raisers Edge will begin in late 2007 with completion in 2008. Progress towards full implementation has taken longer than originally expected due to the unanticipated length of time that it is taking to identify and hire a new, full time and fully qualified treasurer.
- The Metropolitan Council is responsible for monitoring the budgetary and financial activity of the Church. To do this more efficiently, they have established four oversight committees: finance, audit, investment, and charity. These new committees are chaired by members of the Metropolitan Council. Their membership consists of both members of the Metropolitan Council as well as other members of the Church who, with specific areas of expertise, have been identified and have agreed to participate in the work of one of the committees. The existence of these committees provides balance and additional management oversight in the major financial areas of the Church.
- The finance committee oversees the formation of the annual budget and tracks actual financial performance against the approved budget, as a minimum, quarterly.
- The audit committee develops and approves financial policies and procedures and conducts oversight to assure adherence to all published policies and procedures. The finance and audit committees work closely with each other to assure financial integrity and strict adherence to the operating budget at all times.
- The investment committee is responsible for financial management oversight of all Church endowment and restricted funds.
- The charity committee manages all funds raised for charitable purpose. The committee recommends to the Metropolitan Council the specific recipients of charity funds.
- Reports from each of these four committees concerning their activities and recommendations for action or approval by the entire Metropolitan Council are becoming an integral part of the bi-annual Metropolitan Council meetings.
The complete text of the status report, titled “Responses to the 32 Observations and Recommendations,” appears below.
”(1.) General - cash deficit.
“Observation - The Church is experiencing net operating deficits and has had to use temporarily restricted funds for operating purposes.
“Recommendation - Management should develop a short-term and long-range plan to ensure the financial health of the Church.
“Status as of July 2007: The Church stopped using restricted funds for operating expenses immediately following the 14th All-American Council held in Toronto, Canada in July 2005. The practice of using any two of three authorized signatures for financial transactions was discontinued shortly after the 14th All-American Council. The practice of using two of two signatures was instituted with the signature of the acting treasurer and the Metropolitan as the two authorized signatures.
“A Donor’s Bill of Rights has been incorporated into its Best Practices Principles and Policies for Financial Accountability; the Bill of Rights requires use of restricted funds only for the donor’s intended purpose. In addition, the Church adopted stringent cost controls in the last three quarters of 2006. The net result of this short-term plan was a small surplus at the end of 2006.
“At the most recent meeting of the Metropolitan Council, a number of check signing procedures were proposed and approved. The following procedures have been implemented:
“a. The pre-signing of any checks is prohibited.
“b. All checks require the two authorized signatures.
“The following procedures approved by the Metropolitan Council will be implemented when a new treasurer is hired:
“a. One authorized signature is required for pre-approved budgeted expenses under $15,000.00.
“b. Two authorized signatures are required for all non-budgeted expenditures.
“c. Two authorized signatures are required for all designated appeals monies distributions.
“As a second step, the stringent financial policies of late 2006 were extended to 2007 budgeting. The premise for the 2007 budget was that income would continue at the 2006 level for assessments from dioceses, with very modest additional contributions from other voluntary giving, e.g., the Fellowship of Orthodox Stewards [FOS]. On the expense side, a reduction in payroll and payroll-related expenses occurred by streamlining the organization of the Chancery. This streamlining, including the termination/retirement of employees and transfer of job functions, is projected to produce an annualized cost reduction of about $500,000.00 from first quarter 2006 budget figures. The adopted 2007 budget is realistic, achievable, and balanced. The budget is being closely monitored throughout the year to anticipate and reflect changes in expenses and income; the objective is to maintain a balanced budget through the end of the year. Soon after close of the second quarter, a revised projection for 2007 will be prepared, based on current known financial items expected for the second half of 2007. A draft budget for 2008 is planned for presentation to the Metropolitan Council and Holy Synod at their joint October 2007 meeting.
“The long term financial plan for the OCA includes as a first priority the establishment of trust within the Church through demonstrated commitment to fiscal integrity. Implementation of Best Practices Principles and Policies for Financial Accountability, and a proven track record of balanced budgets and timely financial reporting, is the backbone of this effort. Once trust has been reestablished, focus will turn towards building up the development and stewardship components of income. This effort will include a shift in budgetary emphasis toward ministry and evangelization, while minimizing unnecessary administrative expenses. Emphasizing ministry and evangelization will, in turn, provide a basis for gaining additional directed and supplemental income to augment Diocesan assessments. These actions, coupled with strengthened communications and transparent financial integrity, will gain the membership support needed for the continuing growth of the Church - through its ministries and evangelization activities. Long-term plans also include a study of the proper and necessary role of the Central Church Administration, its dioceses, and its parishes. The outcome of this study will be a Chancery budget that funds only those activities deemed appropriate and necessary for the central administration of the Church.
”(2.) General - distribute work load evenly.
“Observation - While our audit procedures are not specifically designed to include an evaluation of employee performance, based upon our limited review and observations, we feel that the employee work load is not evenly distributed within the accounting department. This structure can cause poor morale and create high turnover of employees, not to mention, the weaknesses created in the system of internal controls.
“Recommendation - This situation should be reviewed. A reallocation of duties and responsibilities that enables a more efficient work flow that produces financial information in a timely and accurate fashion may be necessary.
“Status as of July 2007: As described above, the Metropolitan established an organizational task force in September 2006 to study in detail the Chancery operating structure and make recommendations for improving efficiency and reducing costs. Task force members were selected based on their experience in accomplishing this type of work in organizations outside of the Church. By December 2006, the Metropolitan Council and the Holy Synod of Bishops had adopted the Task Force Report and authorized implementation of the recommendations, including a major restructuring of the Chancery for better distribution of work, improved accountability, and reduction in administrative costs. A public search began for recruitment of four senior leadership positions in the Church. To date three positions have been filled. The search for a treasurer is still underway with a goal of completion by the beginning of the fourth quarter 2007. The implementation of the new organizational structure is expected to be finished by the fourth quarter 2007.
”(3.) General - activity entered to fund balances.
“Observation - Certain designated or restricted transactions are entered directly to the fund balance accounts in the general ledger system, rather than to the appropriate revenue and expense accounts. This resulted in differences between the beginning fund balances as compared to the closing fund balances for the preceding year, and requires additional journal entries to adjust fund balances and properly record them to revenue and
expense accounts during the audit.
“Recommendation - Care should be taken to ensure that revenue and expense activity is never recorded directly to fund balance accounts. This will preserve fund balances with regard to opening balances, and will allow for accurate recording of all revenue and expense activity for the year.
“Status as of June 2007: These types of accounting practices issues are being addressed by the procurement of new accounting software, training for personnel affected by the new software, and the addition of new financial management personnel experienced in accounting and modern financial software applications. The previous comptroller has been relieved of his general ledger duties effective with the close of the 2006 books.
“While a search continues for a full time treasurer with an accounting background to manage all the financial activities of the Church, the present staff will soon be augmented by a bookkeeper/accountant on a temporary basis to oversee the general ledger accounting functions of the Church and provide the required financial reports from the new financial software. Discipline to good accounting practices will be of prime importance for the future in the accounting department of the Church; this includes adoption of the other financial operating recommendations that follow in this letter.
”(4.) General - accounting and administrative policies and procedures manual.
“Observation - The Church does not have a comprehensive, detailed accounting and administrative policies and procedures manual. Written procedures, instructions, and assignment of duties will prevent or reduce misunderstandings, errors, inefficient or wasted effort, duplicated or omitted procedures, and other situations that can result in inaccurate or untimely accounting records. A well-devised accounting manual can also help to ensure that all similar transactions are treated consistently, that accounting principles used are proper, and that records are produced in the form desired by management. A good accounting and administrative manual should assist in the training of new employees and possibly allow for delegation to other employees of some accounting functions management performs.
“Recommendation - It will take some time and effort for management to develop a comprehensive manual. However, we believe that this time will be saved later in training and supervising accounting personnel. In the process of the comprehensive review of the existing procedures to develop a manual, management may discover procedures that can be eliminated or improved to make the system more efficient and effective.
“Status as of July 2007: This recommendation will be acted upon with the hiring of the new full time treasurer. It should also be noted that two of the Metropolitan Councilsubcommittees described above provide further focus and oversight of the financial practices of the Church: theaudit and finance committees. The audit subcommittee has as its focus the development of the standard practices and procedures in manual format in order that the stated benefits of such a manual can be realized. A draft manual will be a priority for adoption in early 2008.
”(5.) General - conflict of interest policy.
“Observation - A not-for-profit organization is required to exercise due care in relationships with board members and executive management. It is important to establish policies and practices such as a policy on potential conflicts of interest that provide guidance for these relationships. Conflicts of interest arise whenever a trustee or manager with decision-making influence has a personal interest in a proposed organizational transaction. Conflicts of interest transactions must be properly handled to avoid self-dealing. The Church does not have a comprehensive conflicts of interest policy.
“Recommendation - We recommend that the Church adopt an appropriate policy and monitoring plan. We also recommend that you provide an annual report to board members disclosing details of related party transactions.
“Status as of July 2007: This recommendation has been accepted and acted upon. A conflict of interest policy has been incorporated into the recently approved and adopted Best Practices: Principles and Policies for Financial Accountability. Within the policy an annual signed statement by all employees, board members, and department chairpersons of the Church testifying that they have no conflicts of interests, as defined by the policy, is mandated and required. It is anticipated that signed statements will be received by or at the forthcoming Metropolitan Council meeting in October, 2007.
”(6.) General - disaster recovery plan.
“Observation - The Church’s accounting department does not have well-defined, written disaster recovery procedures.
“Recommendation - The time to make contingency plans is before disaster strikes, so that all personnel will be aware of their responsibilities in the event of an emergency situation that precludes the use of the existing EDP facilities. We suggest that management develop a disaster recovery plan that includes, but is not limited to, the following matters:
“a. Location of, and access to, off-site storage.
“b. A listing of all data files that would have to be obtained from the off-site storage location.
“c. Identification of a back-up location (name and telephone number) with similar or compatible equipment for emergency processing. [Management should make arrangements for such back-up with another company, a computer vendor, or a service center. The agreement should be in writing.]
“d. Responsibilities of various personnel in an emergency.
“e. Priority of critical applications and reporting requirements during the emergency period.
“Status as of July 2007: The need for the recommended disaster recovery policy has been accepted. This will become a priority of the new treasurer and secretary to formulate and implement. Two components of the disaster recovery plan have been identified and action initiated to correct: backup to software and computer files and backup to the hard copy files and records of the Church. The newly appointed systems information manager has begun work on the development of the software backup recovery systems. Procurement is underway for a fireproof and secure location off-site where backup files can be stored and maintained. Scanning of all important documents, such as endowment agreements, will be undertaken, digitized and stored off site. The target date of January 2008 has been established for the completion of the disaster recovery plan and its implementation in accordance with the recommendations outlined above.
”(7.) General - internal control and systems review.
“Observation - Performing a review of current policies and procedures can greatly assist the Church and management in fully understanding day-to-day activities as well as disclosing any potential current inefficiency.
“Recommendation - The Church should consider initiating a thorough review of current internal control procedures and policies and evaluate the need for changes or improvements to enhance the effectiveness and efficiency of current operations. Furthermore, we suggest that the Church include a review of its information technology policies and processes as a component of this task.
“Status as of July 2007: This recommendation is in the process of implementation with three planned component actions. The organizational task force, in accordance with its charter, is currently developing a Chancery Human Resources Policies and Procedures Manual. A salary scale has been established that standardizes salaries based on the demands of the job descriptions, and compatible with regional salary scales of the federal government for the New York area. It is planned to update these scales on an annual basis using federal government guidelines. Job descriptions for Chancery employees have been developed and distributed, along with notification of new salaries in accordance with the newly established salary guidelines.
“The audit committee of the Metropolitan Council has undertaken the task of overseeing and approving the preparation of the policy and procedures manual for Church operations at the Chancery. It is expected that the completion of such a manual will not be accomplished before the end of the second quarter of 2008, although components of such a manual will be issued as they are completed. As a completely new management team is being assembled, treasurer, chancellor, secretary, and director of ministries and communication, in accordance with the newly adopted organizational structure, this team will work closely with the audit committee in the development of the aforementioned manual. Review of practices formulated to produce maximum productivity and efficiencies will be an ongoing role of the reorganization task force.
“Finally, the new systems information manager has been tasked with the preparation of a systems information manual for all employees of the Chancery. Training in computer software programs currently available to employees and appropriate to their job requirements has been instituted. Computer hardware upgrade is underway. A target date for the completion of the recommended systems information manual is the beginning of the second quarter of 2008.
”(8.) General - changes in federal law.
“Observation - In recent years, there have been changes in federal laws that require attention by each non-profit organization. The Church should review the laws with legal counsel and develop policies and procedures for the following:
“a. Whistle-Blower policy; and
“b. Records retention policy.
“Recommendation - We recommend that the Church consult with legal counsel to develop appropriate policies and practices based on changes in the law. Additionally, we strongly recommend that the Church develop and publish a policy that provides a whistle-blower with appropriate direction for reporting suspected or actual wrongdoing or improprieties by Church officers, directors, or other employees. The policy should also describe the whistle-blower’s protection against retaliation under federal law. A whistle-blower policy should include, among other provisions specific to the Church, the following elements:
“a. Provide confidentiality and anonymity to the whistle-blower.
“b. Identify a channel for anyone, including vendors, suppliers, internal and external auditors, consultants, advisors, and board members, to report information they may have.
“c. Provide a choice of methods for whistle-blower to report, such as phone, e-mail, letter, etc.
“d. Put reported information into the hands of people who can and will act on it.
“e. Establish accountability to ensure that management can’t sweep information ‘under the rug.’
“f. Provide options for investigation and resolution.
“g. Formally publicize the whistle-blower system.
“h. Protect the whistle-blower.
“Status as of July 2007: The recommended whistle-blower policy has been adopted and is covered in detail as a section of the Best Practices: Principles and Policies for Financial Accountability. The policy calls for publicizing by the posting of the document on bulletins boards in the chancery in addition to periodic discussion of its contents in staff meetings. In addition, the Church has begun the process of finding a new general counsel to handle its legal requirements.
”(9.) Accounts payable - tracking.
“Observation - Accounts payable information is tracked on manually handwritten spreadsheets.
“Recommendation - Accounts payable information should be entered into the computer in order to facilitate easy tracking. Manually tracking accounts payable can lead to errors and difficulty in tracing and correcting any adjustments that need to be made, as well as determining vendor balances.
“Status as of July 2007: This recommendation has been implemented with the procurement of the new financial software of the Church.
”(10.) Cash receipts - initial receipt of monies.
“Observation - Checks that are received by mail are not immediately endorsed when the mail is opened, but are delivered to the fiscal manager. This practice exposes the Church to the threat of a loss or theft of receipts.
“Recommendation - In order to strengthen internal controls over cash receipts, we recommend that checks be immediately restrictively endorsed when the mail is opened by stamping checks with the Church’s name, checking account number, and the words ‘for deposit only.’
“Status as of July 2007: This policy has been implemented by a memorandum dated July 24, 2007, from the acting treasurer to the appropriate finance department employees. It will be incorporated in the new financial policy and procedures manual.
”(11.) Cash receipts - initial receipt of monies.
“Observation - Checks that are received by mail are not logged, checked, or compared against the deposit slip or cash summary sheet unless a question arises.
“Recommendation - A system for tracking the checks is necessary to enhance control in this important area. Checks that are received by mail should be logged by the receptionist, an adding machine tape, or other log of the total amount of checks should be prepared by the receptionist before the checks are given to the fiscal manager. This daily cash receipt log should later be reconciled to the authenticated (bank-stamped) deposit slip by someone not associated with the cash functions on a regular basis.
“Status as of July 2007: The acting treasurer has implemented this recommended procedure by memorandum dated July 24, 2007. In addition, this procedure will be incorporated into the new financial policy and procedures manual.
”(12.) Cash disbursements - invoice payment.
“Observation - Many invoices were paid without approval by an authorized individual.
“Recommendation - The Church should adopt a policy that requires clear written evidence of approval of all disbursements by a responsible person.
“Status as of July 2007: The acting treasurer has issued a memorandum dated July 24, 2007, to employees of the Chancery outlining the need for all invoices to bear an appropriate management level signature prior to payment. In addition this recommendation will be incorporated into the new financial policy and procedures manual.
”(13.) Cash disbursements - invoice payment.
“Observation - Several check disbursements did not include a copy of an invoice or other form of supporting documentation.
“Recommendation - Sufficient documentation must be provided to the persons responsible for signing checks. This documentation is necessary to ensure that checks are issued only for valid disbursements. Original invoices or other supporting documents must accompany the check requests, and checks must be signed only after the signer reviews the appropriate supporting documentation. This will minimize the potential for errors.
“Status as of July 2007: This recommendation has been implemented by the acting treasure by a memorandum dated July 24, 2006 as part of the signature approval process for payment of all invoices and the issuance of all checks. It too will be incorporated in the new financial policies and procedures manual.
”(14.) Cash disbursements - loans and advances to employees.
“Observation - The Church periodically loans or advances money to employees and, in some cases, has not been able to collect the balances owed. In two cases, money was loaned on an interest-free basis. Without prompt repayment, these advances could be construed by the Internal Revenue Service as ‘excess benefit transactions’ which are subject to excise tax penalties.
“Recommendation - We recommend that the Church adopt appropriate policies regarding employee advances and repayment of advances. As a tax-exempt organization, the Church must avoid ‘private inurement,’ which is defined as use of the Church’s assets for private interests. Insiders that receive economic benefits in excess of the value of consideration given for such benefits are subject to excise taxes, as are any members of management that knowingly participate in the excess benefit transaction. Loans or advances to insiders on non-arms-length terms could be considered an excess benefit transaction. It is important that any advances be promptly paid off. All advances must also be supported by appropriate documentation. Lastly, the Church should develop a plan to collect current outstanding advances.
“Status as of July 2007: The practice of issuing loans and or advances to employees of the Chancery for personal expenses has been discontinued. The identification and collection of any outstanding cash advances or personal credit card transactions initially paid by the Church and found to be of direct benefit to an employee or former employee and not of the Church continues. At this time, we are aware of a significant outstanding balance receivable to the Church caused by acknowledged use of credit cards for personal use. The resolution of this outstanding receivable remains to be completed. In a second instance, the amount is much smaller, but still in dispute.
”(15.) Cash disbursements - credit card usage.
“Observation - There are hundreds of thousands of dollars worth of charges to several credit cards. Some of these credit cards were in the Church’s name and some were personal credit cards of employees who later submitted such charges to the Church for reimbursement. In the majority of cases, no documentation or original receipts were submitted to support the purchases.
“Recommendation - Employees must provide adequate and timely accounting for expenses incurred in connection with their performance of services. If these requirements are not met, the employer must treat any unsubstantiated amounts as wages subject to withholding and payment of employment taxes. This includes amounts charged directly or indirectly to the employer through credit cards or otherwise.
“In addition, charges for travel, meals, entertainment, gifts, or use of a passenger automobile fall under the more stringent requirements of IRS Code Section 274(d). To support such expenses, Section 274(d) requires documentation of the following:
“a. the amount of the expense or item;
“b. the time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift purchased;
“c. the business purpose of the expense or item; and
“d. the business relationship to the taxpayer or persons entertained, using the facility or property, or receiving the gift.
“Future employee reimbursements/expenses must be supported by sufficient documentation or evidence as required under the IRS regulations described above. All such items should be supported by actual receipts, descriptions, and other information evidencing the allowability of the business expense, when required under Section 274(d).
“Status as of July 2007: All Church-issued employee credit cards have been cancelled. The recommendation for reimbursement of expenses to be supported by documentation backing up a required standard expense report will be incorporated in the new financial policies and procedure manual for the reasons cited in the recommendation. The major and primary abuse of credit cards by a former employee of the Church has been documented and currently an open item for proper resolution.
”(16.) Cash disbursements - canceling original invoices.
“Observation - Check stubs are attached to corresponding invoices when invoices are paid, but the original invoices are not stamped ‘PAID’ or otherwise canceled. If the copy of the check became separated from the invoice, the Church would have no immediate way to know if an invoice is paid or not.
“Recommendation - All invoices should be stamped ‘PAID’ or are otherwise permanently canceled immediately after payment.
“Status as of July 2007: The recommendation will be incorporated into the new financial policies and procedures manual. In the interim, the acting treasurer has issued a memorandum dated July 24, 2007, to the affected finance department employees to implement the suggestion immediately.
”(17.) Cash disbursements - general ledger coding on paid invoices.
“Observation - Most of the paid invoices examined did not indicate what budget line and class the invoice was authorized to be allocated to.
“Recommendation - Approval and proper coding of vendor invoices for goods and services is a critical element of any internal control structure. We recommend that a policy be established requiring that the approved budget line allocation be clearly marked on all paid invoices.
“Status as of July 2007: This recommendation has been implemented by memorandum dated July 24, 2007, by the acting treasurer until such time as it is incorporated into the new financial policies and procedures manual.
”(18.) Cash disbursements - check payees.
“Observation - Checks are periodically made out to ‘cash.’
“Recommendation - In the event that one of these checks was lost or stolen, checks with ‘cash’ as a payee are easily negotiated by anyone. Future checks are made out to the individual who is cashing the check in order to restrict the negotiability to the payee only.
“Status as of July 2007: The past practice of issuing checks made out to cash has been discontinued.
”(19.) Cash disbursements - cash outlays.
“Observation - Cash is often disbursed to employees for different reasons, such as use on trips to Europe. The forms for such disbursements are often requested and approved by the same individual receiving the cash and often have no supporting documentation. The check itself is also often signed by that same individual.
“Recommendation - All checks issued in which the payee and signatory, or the payee and the person approving the disbursement, are one and the same person must be examined and approved by an independent person. Someone separate from the person receiving the cash should approve and/or sign the check for such disbursements. Adequate segregation of duties will reduce the risk of money being mishandled.
“Status as of July 2007: A written policy implementing the intent of this recommendation will be included in the financial policies and procedures manual. It is anticipated that a ledger of employee receivables will be set up that will be settled when the expense account for the business purpose is submitted and approved by an independent person. There will be a matrix of approving authorities for each person.
”(20.) Cash disbursements - check signing authorization.
“Observation - Persons known to have left the employment of the Church remain on the bank records as authorized signers.
“Recommendation - This represents a major security breach and should be corrected as soon as possible. Only current employees should be responsible for such an important control over cash disbursements. In an effort to relieve this problem and maintain strong controls, we suggest that the Church periodically check the authorized check-signer listing on the bank records and, if necessary, update the information.
“Status as of July 2007: This policy has been implemented and the authorized check signers at this time have been restricted to the present acting treasurer and the Metropolitan. A more comprehensive policy will be developed and incorporated in the financial policies and procedures manual. Initial plans include the following:
“a. A master list of authorized bank accounts and signers thereof will be established.
“b. Each employee’s personnel file will contain his/her authorized duties - including those associated with control over bank accounts.
“c. In the event of a person’s leaving the employ, there will be a check-out list attested to by a senior employee of returned files, notebook computers, phones, ID cards, etc., which are to remain in the possession of the OCA. This check-out list is established when an employee enters the employ of the OCA and is kept up-to-date with the appropriate model descriptions and serial numbers of the identifiable equipment/other authorizations (e.g., bank signing, approval authority, etc.) entrusted to the employee. The last paycheck will be held back until all items are returned and properly attested to.
”(21.) Payroll - employee bonuses.
“Observation - The chancellor disbursed to himself almost $10,000 in cash, partly to pay year-end employee bonuses. However, the chancellor received no authorization to give employee bonuses. Since the bonus payments were not paid through the payroll management company, there was no record or proof of how much was given to each employee, or when and if the monies were received by the appropriate parties. Additionally, no income tax was withheld from these bonus payments.
“Recommendation - Employee bonuses should be paid through the payroll management company to reduce the risk of error or potential for fraud. Withholding of federal income taxes is generally required to be done for all payments of compensation. This practice of paying cash bonuses could result in the assessment of penalty charges against the employees for the underpayment of individual income taxes and could result in a potential liability to the Church. In addition, Church management should obtain the approval and written authorization of the Administrative Committee prior to issuing employee bonuses.
“Status as of July 2007: Past practices concerning employee bonuses have been discontinued. No employee bonuses were paid in 2006 and none are anticipated for 2007. If and when it is deemed desirable to issue employee bonuses, it will only be done so with the prior approval of the Metropolitan Council and in a manner consistent with proper payroll policies, including the withholding of income taxes due. The Human Resource Policies and Procedures Manual will outline processes for annual performance reviews and implementation of pay changes.
”(22.) Payroll - minister housing allowance.
“Observation - The Church does not require ministers to submit estimates of housing costs and fair rental housing value to substantiate the designated annual housing allowance amounts.
“Recommendation - To better monitor the housing/parsonage allowances approved by the committee, an allowance request form should be submitted by each minister requesting a housing allowance. Such a form should include the following:
“a. A work sheet of housing expenses incurred by the minister in the previous calendar year (to be completed by the minister).
“b. A work sheet of housing expenses expected to be incurred by the minister in the coming year (to be completed by the minister).
“c. An estimate of the fair rental value of the furnished dwelling, including all utilities.
“d. A notice to advise the minister of the IRS requirement that the correct housing/parsonage allowance amount permitted for tax purposes is the lesser of three items - fair rental value, actual amount spent, amount approved in advance by the Church.
“Status as of July 2007: Written requests for housing allowance are required from all clergy employees. However, the standard form will be reviewed to assure compliance with the recommendation put forth requiring specific information be provided to the Church that back ups the requested housing allowance. Any necessary corrections, deletions, or additions to the form will be incorporated prior to the addition of any new employees in 2007 or by the end of 2007 and in preparation for the 2008 calendar year.
”(23.) Church assets - vehicle use.
“Observation - The Lincoln SUV owned by the Church for Church business is being used for personal use, such as commuting to and from work.
“Recommendation - Adequate documentation should be provided by employees regarding the use of vehicles owned or leased by the Church. vehicles owned or leased by the Church are for business use only. Any personal use of such a vehicle constitutes compensation received by the employee from the employer and would, therefore, be considered taxable income.
“Status as of July 2007: The practice of using Church owned vehicles for personnel use has been discontinued.
”(24.) Controls - segregation of duties.
“Observation - One individual is involved in many aspects of payroll, cash disbursements, banking transactions, and general ledger recording. This individual prepares checks, prepares payroll, records cash receipt and disbursement entries, prepares bank reconciliations, and prepares financial information. In addition, there are no other employees required or trained to perform those functions in his absence. This could cause problems in the event this individual became sick or was suddenly unable to perform her duties.
“Recommendation - Responsibilities should be divided among appropriate positions so that control risk is reduced. Although the size of the accounting and administrative staff limits the extent of segregation of duties, steps should be taken to segregate incompatible duties. The basic premise is that no one person should have access to both physical assets and the related accounting records or to all phases of a transaction. Additionally, when possible, employees should be cross-trained.
“Status as of July 2007: This recommendation has been incorporated into the new organizational structure of the Chancery. Cross-training of employees will also be instituted as part of the reorganized finance department as it assumes new leadership. The cross-training process has been recently begun.
”(25.) Controls - inadequate safeguards over undeposited cash.
“Observation - Undeposited cash is being stored in unsecured locations, such as unlocked drawers or cabinets. This situation creates the possibility that funds could be taken by an unauthorized individual.
“Recommendation - In order to safeguard for such an event, undeposited cash should be kept in a locked box or cabinet accessible only to those with proper authorization.
“Status as of July 2007: This recommendation has been implemented by the acting treasurer by memorandum dated July 24, 2007 until it is incorporated into the new financial policies and procedures manual.
”(26.) Controls - voided checks.
“Observation - Checks that were voided were not defaced. This practice allows for a certain loss of control over the cash disbursement process and the possibility that a voided check might not be voided at all.
“Recommendation - All voided checks should be defaced with the signature portion of the check removed and the check retained and accounted for in numerical sequence.
“Status as of July 2007: This recommendation has been implemented by the acting treasurer by memorandum dated July 24, 2007, pending incorporation into the new financial policies and procedures manual.
”(27.) Controls - unopened bank statements.
“Observation - Unopened bank statements are currently directly forwarded to the individual who performs the bank reconciliations.
“Recommendation - Unopened bank statements received in the mail should be forwarded directly to someone independent of the receipt and disbursement functions, such as the treasurer. This person should review the bank statements and cancelled checks for any strange or unusual items and investigate these items, should any be found. Documentation of their review should be made on the face of the bank statements. This practice will provide a strong check and balance on the internal controls over cash.
“Status as of July 2007: This recommendation has been implemented by the acting treasurer by memorandum dated July 24, 2007, pending incorporation into the new financial policies and procedures manual.
”(28.) Controls - outstanding checks.
“Observation - Bank reconciliations included checks that were outstanding for well over 90 days that had not been investigated.
“Recommendation - Tracking outstanding checks is an important control procedure that ensures that all outgoing checks are accounted for. An accurate outstanding check list should be kept for each bank account and a periodic review of the list(s) should be performed on a timely basis. Outstanding checks that are more than ninety (90) days old should be investigated, adjusted for, and written off with appropriate stop orders placed with the bank, when necessary, as a part of tight control over cash disbursements.
“Status as of July 2007: This recommendation has been implemented by the acting treasurer by memorandum dated July 24, 2007, pending incorporation into the new financial policies and procedures manual.
”(29.) Controls - bank reconciliation review.
“Observation - Bank reconciliations are performed by an individual involved in the receipt and disbursement of cash. In addition, there is currently no procedure in place to review the bank reconciliation after it is completed. This practice would greatly enforce the checks and balances necessary for strong controls over cash.
“Recommendation - Bank reconciliations should be reviewed by a responsible individual. Documentation of their review should be made on the face of the reconciliation.
“Status as of July 2007: This recommendation has been implemented by the acting treasurer by memorandum dated July 24, 2007, pending incorporation into the new financial policies and procedures manual. It is currently planned to assign this function to a temporary contracted accounting employee.
”(30.) Controls - reconciliation of year-end wages.
“Observation - The Church does not reconcile the total W-2 wages at year end to the wages recorded in the general ledger and payroll register or to the quarterly tax return filings.
“Recommendation - This practice serves as a check on the accuracy of the record keeping process and a control over the payroll process. The total W-2 wages submitted to the Internal Revenue Service at year end should be reconciled and agreed to the general ledger and payroll register account at the end of the year and to the total of the quarterly payroll tax filings. Any differences should be investigated and resolved as soon as possible.
“Status as of July 2007: This recommendation will be implemented at the closing of the 2007 year by the new appointed treasurer. In addition it will be incorporated into the new financial policies and procedures manual.
”(31.) Controls - inventory counts.
“Observation - The Church has a physical inventory, but does not have formal procedures for performing a physical inventory count, and has not performed a count in several years. This is a serious weakness in the system of controls and has the potential for allowing abuse including fraud and other defalcation to exist and not be detected.
“Recommendation - The Church should conduct an annual periodic inventory count at the end of every year. Additionally, the Church should formally document the procedures for performing its physical inventory counts. These instructions should include specific tasks to be done by the Church’s personnel, specific tasks to be done by the accounting department, completion of the tags and completion of the control sheets. The written instructions should also include reconciliation and recount procedures. Strong accounting and control procedures over inventory will be of significant benefit in providing better financial information with which to make well informed business decisions.
“Status as of July 2007: The recommended practices concerning annual physical inventory of all assets of the Church will be accomplished at the close of the 2007 year and will be the subject of the new financial policies and procedures manual.
”(32.) Controls - remittances of pension contributions.
“Observation - There are no procedures in place to ensure that employee pension contributions are remitted to the trustee timely. At times, multiple months of employee contributions are accumulated and paid in one payment.
“Recommendation - Late remittance of employee pension contributions could result in penalties with the Internal Revenue Service and related state agencies. Management should design and implement safeguards that will ensure that these tasks are completed properly and timely.
“Status as of July 2007: This recommendation will be complied with effective immediately. It has been implemented by a memorandum from the acting treasurer to finance department employees dated July 26, 2007.”