Independent auditors have reported what they describe as a “significant discrepancy” involving internal controls in their audit of the Presbyterian Church (U.S.A.) A Corporation – the denomination’s corporate identity – for the year ending Dec. 31, 2015.
Kears Pollock, chair of the board’s audit committee, raised the issue in his report to the Presbyterian Mission Agency board on April 29. Pollock told the board that the auditors have not released the final report, but “we will have a clean report, an unqualified report,” although “there was a significant discrepancy noted.”
A letter dated April 27 from the board’s audit committee outlines the problem.
It states that the independent firm conducting the audit, Crowe Horwath LLP, has informed the audit committee that it “will be issuing an Internal Control letter which will state there is a Significant Deficiency in the Internal Controls concerning the valuations of the beneficial interest in perpetual trusts held and administered by outside trustees.”
The letter states that “a Significant Deficiency is defined as ‘a deficiency, or deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention of those charged with governance.”
The errors were that the percentage ownership for the church corporation wasn’t correct, and the trust information had not been updated for the year 2015, the letter states.
The letter also states that “the Presbyterian Church (U.S.A.) Foundation is the outside trustee and it was determined by Crowe that the Foundation ‘did not monitor the receipt of current valuation information for all trusts, and their internal controls were not designed to detect errors in manual records for the percentage of trust ownership used to calculate PC(USA)’s value for the trust.’ ”
It states, “the valuation error that Crowe identified was an undervaluation of approximately $700,000.”
That’s complicated stuff. What it means in part is this.
A problem was discovered that was considered a “significant discrepancy” – meaning it needs to be addressed and corrected, but did not rise to the more serious level of “material weakness,” according to Molly Baskin, vice-chair of the audit committee. Six trust accounts were involved for which information was not correct, she said in an interview.
The funds involved were not endowment funds held at the Foundation, but trusts established at banks or other financial institutions – so “we’re not custodians of those assets,” Greg Rousos, the Foundation’s chief operating officer, said in an interview.
The problem here: Some of those financial institutions were slow in reporting updates to the status of those funds, so when the Foundation reported figures to the Presbyterian Mission Agency (PMA), some of those numbers “were stale, were dated,” Rousos said.
The trust funds involved affect only PMA – not any congregations or mid councils, he said.
Endowment funds that the Foundation itself holds – established, for example, by congregations or mid councils – “are audited and verified” regularly, Rousos said. “This had nothing to do with that,” so congregations and mid councils should feel confident that the endowments they establish with the Foundation “are audited and checked” routinely and consistently.
The error did not reduce the amount of money that the Foundation sent to PMA, Rousos said. “It doesn’t affect their income at all,” he said of PMA. While income wasn’t affected, “I will tell you there were some stale statements that went over” involving trusts held at other banks.
While the Foundation sent some outdated information to PMA, the audit committee determined that both agencies share some responsibility for the error.
The audit committee’s letter states, “the responsibility for the accuracy of the information in the Church Corporation’s financial statements rests with the Presbyterian Mission Agency’s (PMA) management, including information it receives from third parties. It is PMA’s management responsibility to assess the internal controls of third parties over the Church Corporation’s assets. Controls need to be developed and instituted to monitor the effectiveness of the third party internal control systems that provide information that PMA’s management places reliance on for its financial reporting.”
The audit committee is recommending that “PMA’s management institute appropriate procedures designed to preclude this from occurring in the future, and that the Board and Management of the Foundation be formally informed of the Control Deficiency that was, in part, caused by internal controls of the Foundation which did not prevent this matter.”
The audit committee letter refers to a $700,000 undervaluation. To put that in perspective, Rousos said that the Foundation holds $460 million in funds that have been given to the Foundation or one of its constituent corporations from which PMA either receives income (meaning it has a beneficial interest in those funds) or for which it is a dispersing agency (meaning it can use funds generated for ministry).
Earline Williams, chief financial officer for the PC(USA), declined to comment, referring questions to the audit committee.
Baskin, the committee’s vice chair, said the outside auditor’s findings mean the Foundation erred in not sending completely accurate information, and for PMA, “we didn’t check it closely enough. … Internal controls need to be improved on both ends.”
Asked how significant a matter this is, Baskin responded: “It could have been a big deal. We were lucky it wasn’t.”
