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Audit

Getting Your Staff Ready for the Annual Audit

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As the manager of a nonprofit organization, you’re probably all-too familiar with the paperwork aspect of the annual nonprofit audit. Documents must be managed, maintained, and updated, and everything prepared for the auditors.

There’s a second part of managing the audit process that’s equally as important: managing the people who are part of the audit. To help you with this aspect of auditing, we’ve put together the following tips.

Schedules

  • Make sure you schedule the audit well in advance of any deadlines. Be sure to set aside enough time for your staff so that they can be available to assist the auditors in any way necessary.
  • Contact the auditing firm and confirm that the dates for the audit are available. Auditors’ schedules may be booked months in advance. Be sure to confirm again the week prior to the scheduled audit to ensure nothing has slipped through the cracks.
  • When scheduling your audit, offer three days and times that work for all. Allow the auditors to choose the one that works best for them.
  • Clear calendars to make sure no offsite or other meetings will interfere with the audit schedule.

Logistics

  • Provide a clean, private, well-lit workspace for the auditors to use while they are at your company.
  • Create the necessary computer and WIFI access in advance so it is ready for the auditors immediately.
  • Ensure that a telephone line is also available for the auditors.
  • If parking spaces are reserved at your building, make sure you take the necessary steps to secure parking spots for the auditors.
  • Provide them with directions on how to get to your building.

Communications

  • Inform the internal staff that an audit is taking place. Reassure them that it is both a necessary and beneficial aspect of nonprofit management – it’s not like a personal IRS audit, but more of a consultation to ensure that your nonprofit is operating correctly.
  • Make sure that staff understands they can’t use conference rooms or other workspaces that the auditors are using during the week.
  • Ask staff not to interrupt the auditors while they are working.

Following Up on the Audit

Once the audit is over, it will take your firm several weeks to prepare the materials and provide them to you. Take time to review them and discuss the findings with the auditors. The final report can then be presented to your Board of Directors.

As a final step, share the audit with your entire team. Although not required as part of a nonprofit audit, the more information that you can share with your staff, the better they will understand what’s going on within the organization as a whole. They’ll feel invested in the outcomes and better informed about the financial aspects of the organization. The more information they have, the better they can do their jobs.

Preparing for an audit can be stressful, but if you’re organized and take the appropriate steps, you can ensure that the entire audit process from start to finish goes smoothly. Both your auditors and your Board will thank you for the extra effort made to ensure a streamlined process.

Welter Consulting offers auditing as one of our core services for nonprofits. Our experience encompasses audits, consulting, software selection and more for the nonprofit industry. Please contact Welter Consulting at 206-605-3113 for an appointment.

How Good Are You at Detecting Nonprofit Fraud?

By | Accounting, Audit, Fraud, Nonprofit | No Comments

The average nonprofit fraud loss averages around $600,000, according to the NonProfit Times. With so much at stake, understanding your fraud IQ is important. How much do you know about nonprofit fraud?

Principles of Fraud Risk Management

The principles of fraud risk management include:

  1. Fraud risk governance: Establishing and communicating a fraud risk management program demonstrates expectations to all stakeholders. A written program which can be shared is a great idea.
  2. Fraud risk assessment: This includes items such as employment checks, ensuring people take vacation time and more.
  3. Fraud control activity: Selecting, developing, and deploying fraud risk management activities. A good example is a set of internal controls.
  4. Fraud investigation and corrective action: Establishing a communication process to investigate and correct any suspected fraud. Also includes a written, established and coordinated approach to the investigation.
  5. Fraud risk management and monitoring: Every organization should select, develop, and perform ongoing fraud risk management evaluations. Look at these five principles and see how they apply throughout the organization. Any gaps should be addressed immediately.

Data can, and should, be used throughout all of the fraud risk assessment and analysis activities. As we’ve shown in a previous article, Benford’s Curve is one example of how data can be used, albeit a simple use, to indicate possible fraud. CPAs, auditors, and others can use more sophisticated techniques to detect errors and fraudulent activities.

Whose Responsibility Is It, Anyway?

Who on staff is responsible for fraud detection, management, and corrective actions? Your senior management team is ultimately responsible for all of these actions. The Board of Directors provides oversight and guidance, but the “buck stops” at the desk of your senior leadership team.

Fraud Risk Assessment

Fraud risk assessment includes considering all potential routes of fraud. This includes internal and external areas at risk as well as personnel who might have access to materials which enables them to commit fraud.

Even with the best risk assessment and controls in place, it may be impossible to prevent all types of fraud. It is still critical for nonprofit organizations to have fraud risk assessment measures in place, internal controls, and other measures enacted to prevent, limit, and detect fraud.

Stopping Fraud Starts with You

Much is at risk when it comes to nonprofit fraud. It’s not just the potential loss of $600,000 or so, which is, of course, a substantial number. It’s also the risk of losing the trust and faith of the public.

Nonprofit organizations are under heavy scrutiny now from a public who has grown weary of extravagant spending. People want to donate to their favorite charities, causes, and membership organizations, but they won’t do so if they feel their money is wasted. Fraud is one example of waste that many  donors feel can be prevented.

Your organization works hard on behalf of its members, donors, and beneficiaries. Ensuring that you take all necessary steps to prevent fraud and detect it if it occurs is essential to building and keeping the public trust.

For more information on fraud prevention, see:

About 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.

How a Slippery Slope Can Help You Detect Nonprofit Fraud

By | Accounting, Audit, Fraud, Nonprofit | No Comments

Think about the term “slippery slope” for a moment. What do you imagine when you read it? How about a water slide? An article in the Journal of Accountancy compared Bedford’s Law with a theme park water slide, an apt image, and one that’s easy to keep in mind. Keep the concept of a curve in mind when looking at your data and you’ll be able to detect nonprofit fraud more easily.

A Picture of Nonprofit Fraud

In 1938, Frank Benford discovered a naturally occurring numerical law that predicts the frequency of digits in any number set. According to Bedford’s Law, an authentic data set includes the following frequency of digits:

  • the numeral 1 will be the leading digit in a genuine data set of numbers 30.1% of the time;
  • the numeral 2 will be the leading digit 17.6% of the time;
  • and each subsequent numeral, 3 through 9, will be the leading digit with decreasing frequency.

Using Excel data and some simple calculations, you can chart your nonprofit’s numbers on a Benford curve. If the numbers don’t resemble the curve, it’s time to investigate, as something may be amiss.

Using Benford’s Law in Nonprofit Accounting

Benford’s Law works best with large data sets, typically groups of numbers with more than 100 entries. Fewer numbers provide too small a data set to chart accurately. Some recommend 500 or more numbers for improved accuracy.

Other tips include:

  • The numbers must have an equal chance of starting with 1 through 9. If the dataset limits the numbers, Benford’s Law won’t work. Thus, calculating the average height of the Rockettes, the Radio City Dance troupe, doesn’t work because all Rockettes must be between 5’ 6” and 5” 10 1/2” tall; all digits begin with 5, therefore the curve won’t work. Think about this if your products are all priced with the same starting digit. Entering them into the spreadsheet and generating a curve won’t work to detect fraud, i.e., if all conferences run by your nonprofit have a fee of $199 for example.
  • Don’t use it as definitive proof of fraud. Benford’s curve cannot prove or disprove fraud. It’s like a clue that leads you to investigate more deeply into potential fraud. It’s not a good idea to use it to accuse someone of fraudulent activity. It can, however, point to a problem requiring further investigation or the addition of an outside consultant to your team.

To use Excel to plot a Benford Curve:

  1. Use the Column Chart, LEFT, and COUNTIF functions.
  2. Enter the data by name in column A, and numerically in subsequent columns.
  3. Use the LEFT function to extract the first digit of each number in a column.
  4. Copy and use the same formula to extract all the first digits.
  5. Use the =COUNTIF function to count the occurrence of the first digit from each number that you extracted in the step above.
  6. Copy the results to a new cell.
  7. Chart the results.

The previously linked Journal of Accountancy article provides an Excel spreadsheet already set up with relevant formulas that you can download.

By charting the numbers, you’ll either see the Benford curve or a random graph. Some graphs look like straight lines with slight bumps in the middle. This tends to indicate that the data was artificially produced, in which case, fraud may be occurring.

It also may not be an example of fraudulent activity. That’s why it’s important to perform additional checks and investigate potential fraud before making accusations. Sometimes, a bell curve is just a bell curve.

About 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.

Is Your Nonprofit Ready for the New FASB Rules?

By | Accounting, Audit, FASB, Nonprofit | No Comments

In the world of nonprofit accounting, only one thing remains constant: Change. FASB’s new rules are in effect in December 2017. Are you ready?

The Financial Services Accounting Board (FASB) issued new rules for nonprofits in August 2016. Since then, we’ve covered some of the clarifying questions nonprofits asked FASB about various aspects of the rules. This is the first major change to the guidelines for accounting for nonprofits since 1993 and thus a substantial amount of change is going into effect. Let’s take a look at the new rules and how they may impact your nonprofit organization.

Overview of the New FASB Rules

The new guidelines aim at making financial statements easier to read for all stakeholders. Stakeholders such as directors, the public, donors and granting institutions need clarity and consistency when reviewing nonprofit financial statements.

Nonprofit financial statements are more than debits and credits. To the keen eye, they provide a story of how your organization spends its time and money. Providing better clarity and consistency is critical because understanding the financial statements provides insight to decision-makers about which organizations they choose to support.

Four Major Areas of Impact

There are four major areas of impact to nonprofit financial statements. The goals of the changes are to improve:

  1. Simplicity and clarity: As previously stated, FASB hopes that the new guidelines will improve both the simplicity and clarity of nonprofit financial statements. Some level of consistency in the presentation of information is also desirable. The new rules simplify the treatment of net assets. The emphasis is on donor-imposed restrictions. The goal is to classify temporarily restricted versus permanently restricted funds. The current three classifications of net assets are replaced by two categories, restricted and unrestricted. Although the temporarily unrestricted category is eliminated, nonprofits can still provide clarification in the notes section and in other areas of their financial reports.
  2. Clarity on cash and available assets: Nonprofits are now required to reveal any limitations on the use of liquid assets. Quantitative and qualitative information must now be provided to demonstrate how an organization manages liquid assets. It’s a good idea to speak with your nonprofit auditing firm or CPA when preparing financial statements to adhere to this new guideline. Keep in mind that quantitative information is determined by the nature and limit imposed upon it.
  3. Consistency reporting investment expenses and returns: Income must be reported net of related internal and external expenses. Currently, this is optional.
  4. Communication about Statement of Cash Flows and Related Presentation Options: Nonprofits may continue to present operating cash flows using direct or indirect reporting methods at their discretion.

Now is the time to prepare your accounting setup for the new year. If you haven’t adjusted your plans for reporting, this is the time to do so. We urge you to seek professional assistance with your audits or end of year reporting if you aren’t sure how to adhere to the FASB guidelines. It’s important for the financial health of your organization to report its funds and expenses in a clear, concise manner so that donors, the public, granting organizations and directors can understand the good work that you do and how their money is spent.

About 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.