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Audit

Auditing Challenges: No Clear Answers for an Unusual Year

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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

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 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.