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Audit

How to Make a Nonprofit Audit Easier

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Many businesses conduct annual or quarterly audits. Retailers, for example, often work with external auditors to monitor their gross receipts and spot potential shrinkage.

Nonprofits also conduct annual audits. Although there’s no official law that states a nonprofit must conduct an annual audit, many have this requirement written into their bylaws.

If your nonprofit is among the many with an audit requirement written into the bylaws, here’s how to make the audit process easier for both the auditor and your staff.

How Often Should Your Organization Be Audited?

Your organization should be audited at a minimum according to the schedule set forth in its bylaws, but there is no rule that says it can’t be audited more frequently.

Why would you request an audit outside of the normal audit cycle? If you’re undergoing a merger, acquisition, or creating a new legal entity from the parent organization, an audit may be required or, at the least, a good idea. It will help you and your board gain clarity and confidence in the status of the organization’s finances.

Another way in which an audit can be useful is to detect fraud. A 2020 study conducted by the Association of Certified Fraud Examiners (ACFE) found that typical nonprofit fraud involves a median loss per instance of $75,000, and an average loss of $639,000. When every penny should count towards achieving your organization’s mission, all losses should be taken into consideration and dealt with immediately. An audit can detect areas where things “don’t add up” so that you can examine them more closely. Uncovering fraud, waste, or honest mistakes can help reconcile these discrepancies.

Take Notes (and Share Them)

Even before the audit begins, sit down and take notes. It will be helpful to your auditor if you have a list of items they should pay particular attention to during the audit process. These may include:

  • Any large windfalls, i.e., a lump-sum grant or large donation
  • Starting, pausing, or ending a new program or service
  • Any federal grants or funds received
  • New leases, contracts, or long-term debt obligations
  • Significant changes to existing leases or contracts
  • Converting to new accounting or payroll software

Anything that seems significant is likely important information to share with the auditors. Make a list, because it’s easy to forget items when you speak with them. A list will keep you focused and help keep track of all the items to discuss.

A Smoother, Easier Audit

In addition to the audit prep work described here, there are other steps you can take to make your audit easier each year.

  • Your auditor may ask you for a list of documents needed for the audit. Organize these documents well in advance of the date scheduled for the audit so that you’re all set and don’t waste the auditor’s time.
  • Agree on which tasks you may need the auditor’s assistance with to prepare ahead of time. It may be easy to download transactions from your financial software but difficult to prepare financial statements. Work with your auditor on what you may need help completing in time for the audit.
  • Gather all contracts, lease agreements, and similar paperwork and label it for the auditor.
  • Alert staff that an audit will be conducted and ask them to set aside time in their schedules to meet with the auditor. Auditors often wish to speak with key staff members including, but not limited to, personnel from accounting, payroll, and finance, as well as those tasked with grant management.

An audit doesn’t have to be a disruption to your organization’s work. It’s a useful step to detect fraud, reconcile discrepancies, and assure your board, staff, members, and donors that the organization’s finances are in good order.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

What Will Auditors Look for This Year?

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Nonprofits on a calendar-based financial year are already looking ahead to their fiscal year-end and follow-up audit. This year offers numerous challenges for both nonprofits and the auditors who review their data. What will auditors look for this year? What red flags should both nonprofits and auditors look for?

Changing the Way We Work

The coronavirus pandemic arrived in the United States sometime in mid-winter, forcing the closure of many businesses and stay-at-home orders in many states. Nonprofits that did not have work-from-home policies found themselves scrambling to put into place policies and processes that would enable their employees and volunteers to stay safe and healthy while still serving their constituents.

Although everyone hopes for a vaccine or reliable treatment for the novel coronavirus, such things take time.  As the pharmaceutical industry races to find both, we must deal with the reality that social distancing remains the norm for the time being. And how we work, fundraise, and serve constituents has changed too.

Several changes in the way nonprofits work may impact their 2020 audits. Each one has different ramifications and considerations.

Risk of Fraud

Auditors will be especially alert to the risk of fraud this year. For-profit corporations run the risk of fake journal entries to artificially inflate income levels, and nonprofits aren’t immune to such temptations. Some may be tempted to add to their revenues to please boards and members who want to know that their favorite nonprofit is still viable.

Internal Controls

Internal controls that were established pre-COVID 19 focused on office-based controls to manage petty cash, checks, deposits, and similar transactions. With many people working from home and offices maintaining limited in-person staff, such controls may have been ignored or relaxed to keep operations running.

It’s not just lower-level employees who may have been tempted by relaxed internal controls. If accounting staff were unable to access systems remotely, managers may have loosened security settings on various corporate programs. Doing so, they’ve opened the door for themselves or other managers to access what might have formerly been tightly controlled financial data.

Noncompliance

Noncompliance with laws and regulations (NOCLAR) always remains a concern of nonprofit organizations. Many federal and state agencies enacted temporary changes to rules or special stimulus packages to assist organizations during the pandemic. 

But nothing is free, and the money received from stimulus packages and other aid related to the pandemic comes with strings attached. Such programs often require specific documentation to ensure compliance with the rules surrounding them. Now is the time to re-read the fine print on any of the packages or other aid received and ensure that your organization has fulfilled its compliance obligations.

Estimates Associated with Revenue Recognition

Lastly, an area of concern for both auditors and accountants is estimates associated with revenue recognition.  FASB ASC Topic 606, Revenue From Contracts With Customers, is in its first year of implementation and any change to revenue recognition may cause an opportunity for mistakes. With this year being in such turmoil, the risk of mistakes is higher. Accountants must review their revenue recognition approach and policies and correct errors quickly.

Auditors May Work Remotely

Auditors prefer to work on-site but that may not be possible during the next few months as the race for treatment or vaccine continues. Prepare now for your auditors to handle a remote audit  by ensuring that all of the data in your system is updated and accessible with the proper permissions to the auditors.

A cloud-based accounting system such as Abila MIP can make it much easier to work with auditors as well as handle daily accounting and reporting needs for nonprofits. 

Please contact Welter Consulting at 206-605-3113 for more information.

Make Your Auditor’s Life Easy This Year – Pay Attention to These Five Things

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All auditors have their particular worries, those things that keep them up at night. Do your auditors – and your nonprofit – a favor this year. Preemptively tackle these five things that tend to keep auditors up at night and make sure your audit runs smoothly.

Five Things Your Auditor Wished You Knew

If auditors could tell you in advance of things that worry them, they might bring up these five points. Each of these has a simple fix. You can tackle it in advance to help make your auditor’s job easier and the audit smooth-sailing.

  1. Cybersecurity: Among all the things that keep auditors up at night, weak or non-existent cybersecurity is a biggy. And for a good reason: the number of data breaches continues to soar with nonprofits affected just as much as for-profits. Nonprofits may be targeted more frequently than for-profits because criminals know that nonprofits have weaker defenses against cyber intrusions, data breaches, trojans, viruses and other methods to compromise cybersecurity. What do criminals target? Personal data offers a treasure trove of tempting ‘jewels’ for a cybercriminal to steal; donor information, member information, credit card numbers, and other data entice thieves.

Why auditors worry: Cybercrimes can be expensive and result in lawsuits. They can also tarnish the name of a nonprofit, making it difficult for them to continue their work or solicit donations in the future.

The fix: Remind staff not to open suspicious emails. “Phishing” schemes often begin with a simple click through in an email. Don’t download ‘free’ software as some of it may be infected with trojans, malware or viruses. Do add the best virus scanning protection you can to your system and back up data offline. Update software frequently as recommended by the maker since software patches often fix known gaps in code that allow cybercriminals access.

  1. New software: Along with cybercrimes, new software often makes auditors want to pull their hair out. Nonprofits that rush ahead and spent on new software without performing their due diligence may end up with packages that offer too much, too little, or incomplete services.

Why auditors worry: Software can be expensive, and inadequate research into software capacities may lead to unnecessary expenditures.

The fix: Work with a good reseller or consultant to identify needs and find software that fits your nonprofit’s budget. Compare prices, examine existing software to see if you can use it for additional purposes, and find ways to make do with what you have until you finish exploring all options. Discuss software purchases with your auditors in advance to obtain their input, too.

  1. Compliance with funder requests: Grants and donations may come with strings attached. Funders may have multiple requests, each very different, that if unmet, may result in money being canceled. It can be challenging to track, manage, and respond to all funder requests.

Why auditors worry: If a nonprofit does not comply with a funder’s requests, the nonprofit may lose the source of funding.

The fix: Conduct regular compliance audits to ensure that requests are met. Determine areas of overlap and continuity. Create a staffing plan for training so that staff is aware of requests and how to meet them. Keep accurate records and update them frequently to track, measure, and record progress towards meeting funder’s requests.

  1. Financial controls: Nonprofits must balance the need to do good against the need to make margin so they can continue to operate. Nonprofits operating in a global market must worry about accepting cash and controlling cash transactions, while new technology that enables transactions online must also be tracked and measured.

Why auditors worry: Auditors worry about compliance with international standards and laws, monitoring cash flow, and ensuring that cash transactions are accounted for at every step of the way.

  1. Fraud and corruption: No one wants to think about cheating or corruption within their organization. Nevertheless, it can happen, even to the best organizations and people.

Why auditors worry: They worry for obvious reasons – fraud and corruption can lead to nonprofit failures.

The fix: Start with smart hiring procedures that include background checks for all new hires. Include internal controls among all accounting procedures. Provide methods for staff to anonymously report wrongdoing so that “whistleblowers” feel comfortable reporting anything they have observed. Training, procedures, and transparency are all ways to prevent potential fraud.

 Smart Nonprofits Partner with Their Auditors

Auditors are more than just individuals or companies who “audit the books” of a nonprofit organization. They can be valuable allies in the quest to build a sustainable, strong nonprofit organization that meets its objectives and achieves its mission.

The first step is, of course, finding an auditing firm who can become a true partner and asset. Welter Consulting bridges nonprofits and solutions to help them find technology that works for them. We invite you to contact us for any assistance you need with nonprofit technology and business solutions. Call 206-605-3113 or contact us.

Can’t Find Internal Auditors? You’re Not Alone

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If you can’t seem to find internal auditors with some experience for mid-level career positions, you’re not alone, and you’re not imagining the scarcity in the marketplace. There’s a shortage of internal auditors with 5 to 10 years of experience. Worse, many organizations are dissatisfied with the skills of their existing internal audit team.

What’s behind this problem and how can it be addressed?

The Current Situation: Few Are Happy with Current Situation

A study released by Deloitte sheds light on the situation. According to the results of the study, just 13% of Chief Audit Executives are very satisfied with the skills of their current audit team. More than half responding to the study expressed outright dissatisfaction with their teams. How can this be?

We could blame poor leadership, but there are some wonderful CAEs out there, and many organizations have strong leadership, yet weak teams. The real problem lies in the fact that there are few university-level programs that educate people for the internal auditing profession.

Most internal audit professionals begin their careers with a general accounting or finance degree. They end up specializing in the internal audit function by accident. A job opening appears and they take it, entering the audit department as junior level members.

When they reach the mid-career stage, however, many either leave the audit team or seek jobs elsewhere. This leaves a gap within the mid-level ranks.

The trail to the audit team is also one that is not well known to most college graduates. Many graduates with degrees in accounting and business look for work in the for-profit sector. The internal audit function is a relatively hidden profession within the larger sphere of accounting that many might be attracted to if they only knew it existed.

The Remedy: How Can We Encourage More and Better Internal Auditors?

The problem seems clear enough: lack of a formal education pathway into the professional and a lack of clear progression in a career path once established. Lack of awareness for the job’s many interesting facets is also part of the problem.

To remedy this situation, nonprofits might consider the following steps:

  • Recognize that the internal audit department provides a valuable and important function in your organization: Ensure that everyone knows the importance of internal audits and why they aren’t just checks and balances for finances, but are viewed as a valuable aspect of business development. The internal audit function can help nonprofits successfully analyze their finances and plan better for development. They are a vital, integral part of the finance and accounting teams.
  • Support professional development: Offer professional development to your existing internal audit staff. More than half of internal auditors surveyed by the Institute of Internal Auditors, for example, admitted that they lacked training in cyber security, a growing threat to nonprofit organizations. Such training is relatively easy to find online or through many organizations and could bolster your nonprofit’s ability to defend against attacks. These and other professional development opportunities could help your current auditing team feel engaged and motivated, both of which reduce employee turnover and improve retention rates.
  • Talk to undergraduates: Consider contacting the chairs of the local business colleges and ask if you can address business and accounting students on career day or in their accounting classes to share with them what the internal audit function is like and why there are so many opportunities for young, smart graduates in the field. Someone out there may just need a nudge in the nonprofit direction to find a rewarding career as an internal auditor, but they won’t know the career path exists until it is shared.

These are just a few of the steps you might wish to take to help improve the situation among internal audit teams at your own nonprofit and to support the profession in general.

Internal auditors provide so much assistance to a nonprofit, that it’s hard to imagine an organization without them.  Yes, the shortage of mid-career talent is real, but we can do so much more to fix that problem then we are doing now. With the right steps, we could improve the situation and help more people enter the field.

Welter Consulting, Your Bridge to Solutions

Navigating the many options available to you for technology resources can be tricky. There’s always something else tugging at you for attention. Where do you start? How do you decide?

Welter Consulting offers a bridge to solutions that work for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.