The typical auditing process is both an art and a science. Auditors must use their judgment but base their judgments upon generally accepted accounting practices (GAAP), nonprofit accounting rules, IRS requirements, and so on.
But this year, the typical nonprofit audit is anything but typical. Nonprofits in a variety of fields are wrestling with key questions, and auditors are finding their skills taxed to the max.
If your nonprofit is also struggling with its audit this year, here are a few tips to keep in mind to deal with auditing challenges.
Communicate Clearly With Auditors
Few nonprofits had warning that 2020 would be anything but business as usual. With the sudden disruption in everything from fundraising to delivery of their programs, nonprofits experienced anything but the typical year.
Your auditors know that the past year was challenging. What they don’t know is how you coped with it. Your job is to communicate clearly with the auditors working with your organization. They should be apprised of all decisions that impacted finances, from canceling the annual charity gala to hosting a silent auction online.
The board charged with oversight and governance of your organization should meet and review changes to financial plans from the past year. Then, they may need to meet with the auditors to discuss all the ramifications of these changed plans.
Remote Audits Pose Additional Challenges
Many auditors are conducting remote audits this year, either a full remote audit or a portion of the audit. Be sure to organize your documents to save time for the auditors. Ask your staff to set aside time as needed for the audit. They should be as ready to answer an auditor’s questions by phone, text, or instant message as they would be if the auditors were on site and able to drop into their office to ask a quick question.
Risks of Mis-Categorization Increase
Because so much of the work environment has changed in the past year, there is an increased risk of material misstatement. Revenues, services, programs, and fundraising activities may have changed due to the pandemic.
Speak with your auditors and discuss any changes that may be impacting your organization. For example, if a negative income statement will impact your ability to receive grant funds, tell the auditors. Your auditors can guide you through the ramifications of each decision so that you understand the potential outcome of the audit.
Use Technology to Your Advantage
Nonprofit accounting software can be of great help with remote audits. Whole ledger analysis (if available) in your software can help your auditor identify potential risks. Such technology may be able to spot various abnormalities, including transactions that occur outside of normal working hours, a pattern of transactions just under the threshold of management approval, and so on. Using technology as an additional set of eyes on the general ledger can be a huge help to nonprofits.
Review Internal Controls
Another ramification of an unusual business year is, unfortunately, an increased risk of fraud and theft. This is a good time to revisit your nonprofit’s internal controls. Many organizations adapted their internal controls to accommodate telecommuting, but with such adaptations comes increased risk. For example, approvals that used to require a physical signature may now be allowed through the accounting system.
Work with your auditors to review how and when internal controls changed. They may advise you to return to stricter controls or at least return some to pre-pandemic levels. They can also review transactions and ensure that any abnormalities are investigated promptly.
Here’s to a Successful Audit!
Nonprofits adjusted rapidly to the restrictions placed on their activities during the pandemic. Such adjustments, however, do carry consequences and risks. Working together with your auditors, your board and management team can continue to adapt and adjust so that your audited financials tell the complete story of just how your organization weathered the unusual pandemic year.
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.