Common financial statement errors can undermine the credibility of a nonprofit organization and can also make compliance reporting difficult, resulting in audits, fines, and other problems. That’s why it’s essential to be aware of the most common financial statement errors found in small- and medium-sized not-for-profit entities, so you can watch for and avoid them.
5 Common Mistakes
They say to err is human, but your work must be superhuman when it comes to keeping accurate financial records for nonprofits. Even a seemingly small mistake can tremendously affect decision-making within the organization. Here is a nonauthoritative illustration of five financial statement errors commonly found in small- and medium-sized not-for-profit entities. This is not a comprehensive list of all possible misstatements, so be sure to review each financial statement thoroughly.
- Statement of Financial Position Errors
There are several reasons for errors in the statement of financial position, including missing or invalid entries in the general ledger or errors in drafting the statement of financial position by including general ledger accounts on the wrong line item.
There are a few possible errors when using a classified statement, including displaying current assets without current liabilities or incorrectly disaggregating cash and restricted cash.
In addition, it is common to record conditional promises to give as revenue and receivables, trust or foundation receivables before the grantor formally awards the grant, or deferred revenue for amounts received under a grant instead of recording time- or purpose-restricted revenue, especially when the grant is a time- or purpose-restricted contribution rather than a true cost-reimbursement arrangement.
Another common mistake is not including one or more of the required totals: total assets, total liabilities, total net assets, net assets without donor restrictions, and net assets with donor restrictions.
- Statement of Activities Errors
A nonprofit entity quantifies its revenue and expenses in a Statement of Activities. This is the same as a for-profit income statement.There can be errors here, such as omitting one or more required totals, reporting contribution revenue that is due in future periods as net assets without donor restrictions, or not recognizing solicitation costs.
Additionally, revenue transactions may not be properly classified, expenses may be improperly included in net assets with donor restrictions, and fundraising expenses may not be reported.
- Statement of Cashflow Errors
The Statement of Cashflow bridges the income statement and balance sheet by summarizing the amount of cash flowing into and out of an NFP organization. There can be several common mistakes here, including not netting investment purchases and sales, not displaying donor-restricted capital contributions as a financing activity, and not displaying noncash gifts for endowment or property, plant, and equipment.
There may also be errors in netting property, plant, and equipment purchases and sales, borrowing and repaying long-term debt, and failing to include payables and receivables related to investing as investing activities, securities lending activities, and financing activities.
- Statement of Functional Expense Errors
An organization’s functional expenses statement shows how expenses are incurred for each functional area. In a statement of functional expense error, managers of not-for-profit organizations may omit certain applicable expenses on this statement or fail to include them in their financial statements altogether.
A few common errors of this type include failing to include certain expenses in the statement or other presentation and improperly allocating management and general expenses to other functional categories.
Including a function or program line item within the listing of natural expenses and failing to report information about all expenses in one location are other mistakes often seen.
- Errors in Notes to the Financial Statement
Notes to the financial statements convey information not readily apparent or not included in the financial statements themselves that are necessary for presenting the financial position and results of operations fairly.
Common mistakes may include failing to reveal the required disclosure when presenting prior year summarized financial information; i.e., failure to disclose an adequate description of the organization’s activities, including each major class of programs, the capitalization policy for property, plant, and equipment, and discount rates used in present value measurements, such as in measuring unconditional promises to give or split-interest agreements.
Information about the nature of donor restrictions on net assets, the nature of board-designated net assets, the programs and activities for which in-kind donations and contributed services were used, and advertising costs should also be correctly disclosed.
Avoiding Financial Statement Mistakes
To avoid these common errors, it is important for a nonprofit to formally document its accounting processes in detail, including how to accept and deposit donations and pay bills. If your nonprofit doesn’t regularly back up all accounting and tax information, now is the time to start. Meticulous record-keeping is critical to avoiding errors.
Nonprofit expense accounting can be complicated and, as humans, we all make mistakes now and then. You can prevent material misstatements by developing a comprehensive monthly and year-end checklist with your accounting team. In addition, software designed to utilize the most up-to-date best practices will help you avoid these common errors and more and will ensure compliance when reporting transactions.
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 us for more information.
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