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 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 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.