The Right Reverend John Bryson Chane
Bishop of Washington

November 10, 2005

To: Clergy, Wardens and Treasurers

Dear Brothers and Sisters in Christ:

We are very grateful to those of you have submitted your audit reports for 2004, and appreciate hearing from those of you who are in need of an extension.

This letter is prompted by concern about the audit of discretionary funds.

We are hearing some grave concern from the auditors who prepare your reports about the assumption by clergy and congregations that such funds do not have to be audited. This makes our clergy and congregations vulnerable to civil and/or criminal liability. Those of you who have been ordained for some years may not be aware of the increasing vigilance of the Internal Revenue Service and current regulations. In general, these funds are intended for the relief of the poor and are not to be used to cover expenses not in the parish operating budget. If this has been your practice then you need to establish a line item for business expenses for the costs necessary to carry out the cleric's ministry.

We want to insure that our clergy and congregations are protected. Since this matter arises at the end of one audit cycle and before the start of a new fiscal year, I want to call this to your attention so it can be addressed in a timely way.

Let me say for purposes of clarification that such audits are mandatory. Let me refer you to Canon I.7.1 (f) and (g) below.

(f) All accounts of the Diocese shall be audited annually by an
independent Certified Public Accountant. All accounts of Parishes,
Missions or other institutions shall be audited annually by an independent
Certified Public Accountant, or independent Licensed Public Accountant,
or such audit committee as shall be authorized by the Finance Committee,
Department of Finance, or other appropriate diocesan authority.
(g) All reports of such audits, including any memorandum issued by the
auditors or audit committee regarding internal controls or other accounting
matters, together with a summary of action taken or proposed to be taken
to correct deficiencies or implement recommendations contained in any
such memorandum, shall be filed with the Bishop or Ecclesiastical
Authority not later than 30 days following the date of such report, and in
no event, not later than September 1 of each year, covering the financial
reports of the previous calendar year. (Emphasis supplied)

The guidelines for clergy discretionary funds are found in the Manual of Business Methods in Church Affairs, which was mailed to every congregation by the Episcopal Church Center in New York in 2000, and is now the standard policy in this Diocese. If yours has been misplaced, it can be ordered from http://www.episcopalparishservices.org/ for $15.00 or on CD ROM for $10.00. At the very least your treasurer and auditor should have a copy, and you may find that your finance committee or audit committee members would find it helpful.

In any case, I am enclosing the section on discretionary funds and ask that you “read, learn, mark and inwardly digest” this material. Not only do you need to audit these funds, but some of these policies and practices require action by the vestry, which must be recorded in the Minutes. If you prefer not to have these funds audited then all money received into the fund, regardless of sources or use, must be declared to the IRS as personal income to the priest and is subject to tax.

Please, for your own sakes as well as ours, see to it that whatever policies you need to have in place are completed by the end of 2005, so that in 2006 we will have audits of all discretionary funds in hand, copies of any management letters or memorandum, together with the plans you have for remedying any deficiencies.

If you have any questions or concerns, please contact Canon Flanagan at 202/537-6556. She can be of help, or put you in touch with one of our finance people.

In Christ's Peace, Power and Love,

The Right Reverend John Bryson Chane
Bishop of Washington