The Benefits of Data-Driven Audits

By | Accounting, Audit, Nonprofit | No Comments
person at laptop doing audit, interacting with virtual data file screen

The annual audit offers nonprofits an unbiased third-party analysis of their finances. It also assures the public, based on the auditor’s report, that funds are being accounted for correctly.

But many audits are conducted on a routine basis. Auditors often perform the same analysis year after year. Others may focus on areas that have little impact on the overall audit but are easier to see, or things they deem vital, but which may not have a significant impact on the organization.

A data-driven audit, on the other hand, focuses on data from the trial balance and general ledger to conduct a robust risk assessment. From this risk assessment, the auditors then tailor their approach and methodology to identify and assess risk areas. The resulting audit leverages data from both prior years and the current year to present a clear, robust picture of an organization’s financial health and risk areas.

Data-Driven Audits Require the Right Tools

If data-driven audits are so helpful, why aren’t more auditors performing them?

Organizations and auditors need the right tools to perform data-driven audits. This includes financial and accounting software that can provide ready access to current and prior year finances, as well as software to perform complex analysis of the data. This type of analysis cannot be completed easily using a calculator or spreadsheet; auditors who offer data-driven audits typically work with nonprofit software and databases to crunch the numbers they analyze later.

The Benefits of Data-Driven Audits

Data-driven audits provide many benefits. These include:

  • Enhances efficiency: Leveraging software and tools to perform data analysis reduces the auditors’ hands-on time with the finances. They can use their time more efficiently to focus on risk identification and assessment.
  • Improves outcomes: Risk identification enables nonprofits to take remediation steps for improved outcomes. Auditors can review 100% of the information because the initial analysis is completed using technology.
  • Reduces risk: Auditors who do not leverage data-driven audits may miss crucial information because they rely upon sampling techniques rather than a deep-dive into the entire database. Data-driven audits analyze everything, thus reducing the risk of missing something important in the audit.

Supports Remote Audits

Another benefit of using data-driven audits is that most of the technology used to gather and analyze data is cloud-based. Cloud systems enable remote access, meaning that the auditors do not have to spend as many days onsite with you as in the past. They can pull data remotely, analyze it, and focus on findings. This provides a more efficient and cost-effective audit, giving both nonprofits better results and saving auditors time.

With the current accounting employment shortage, in which fewer people seem to be entering the accounting profession, there will likely be a shortage of experienced auditors soon. However, by using technology, auditing firms can increase the amount of work they do, while providing better service and more detailed analysis to nonprofits. This can offset some of the accounting labor shortage.

No Need for a Big IT Department to Benefit from Data

Another benefit to using cloud-based accounting and finance software is the ease with which organizations can add it to their tech stack. Unlike site-based systems, which may require special hardware and personnel to maintain and manage them, cloud-based systems are accessed through the internet. The software provider takes care of maintenance, updates, and security. No special hardware or software is needed to use them either, thus enabling you to continue using the hardware that you have.

Added Value with Few Drawbacks

Data-driven audits add so much value and have few, if any, drawbacks. Not only can they cover more transactions than a traditional audit, but they also help auditors more easily focus on possible risk areas. With the right technology in place, nonprofits can reap the benefits of big data even with limited budgets.

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.

Tips for 2023 Affordable Care Act Compliance

By | Accounting, Audit, Insurance | No Comments

One of the more controversial aspects of recent legislation was the increase of funding for the Internal Revenue Services’ enforcement team. Many expect that the IRS will turn their attention to previously neglected areas of enforcement, including the Affordable Care Act (ACA).

Affordable Care Act: Compliance Basics

If it’s been a while since you reviewed ACA compliance, here is a brief refresher. Large employers with 50 or more full-time employees are required to provide adequate and affordable medical coverage to their employees. If they fail to do so, the penalties include a fine of $229.17 a month or $2,750 for 2022, multiplied by the total number of full-time employees in excess of 30. The 49080H(b) penalty amount of $343.33 a month or $4,120 for 2022 is assessed on a per-employee basis for every full-time employee who receives a premium tax credit after not being offered adequate or affordable coverage.

Compliant Companies May Still Face Audits

Let’s assume that your company meets the ACA coverage requirements and fully complies with the Affordable Care Act. You may feel you’re in the clear. However, just because your company is complying does not mean it is exempt from an ACA assessment. Failing to complete forms 1094 and 1095-C can raise red flags especially if you report health insurance amounts on forms W2 filed with the IRS. This kind of discrepancy can lead to questions from the IRS and/or employees when trying to file their taxes which could lead to fines and assessments being charged to you for non-compliance. This failure can also flag other governmental agencies leading to other non-compliance fines and penalties.

Up until 2021, the IRS held a policy of “good faith,” meaning that if employers can demonstrate they were trying to comply with the requirements in good faith by showing their due diligence, they were given grace to rectify any incomplete or incorrect reports. That grace period, however, ended in 2022, and many are seeing an uptick in IRS inquiries over incomplete or incorrect ACA reporting.

Common ACA Reporting Mistakes

Employers make many ACA reporting mistakes, but these are the most common. Check to ensure you’re not making these common errors on forms 1094 and 1095-C which can lead to unnecessary penalties and requests from the IRS for further information.

  1. Over reporting employees: You only need to issue 1095-C to full-time employees. There’s no need to issue it to part-time employees.
  2. Not validating safe harbor codes: You must validate, or provide documentation, to claim safe harbor for affordability on 1095-C. Speak with your accounting expert or CPA to determine if your company does indeed meet the safe harbor requirement
  3. Avoid “free” reporting services: If your bookkeeping software comes with “free” ACA reporting features, use with caution, and have someone double check the results that understands ACA 1095/1094 filing requirements, even if it comes out of your payroll/accounting system.
  4. Not responding to marketplace notices: Responding to marketplace notices is the first opportunity to prevent mistaken penalties. When an employee is determined eligible for a premium tax credit to purchase coverage from the Marketplace, they typically receive a notice of eligibility determination. If the employee can prove to the Marketplace that affordable, adequate coverage wasn’t made available by the employer when in fact it was, the employer can and should appeal. Don’t ignore marketplace notices or employee concerns that come up while they try to file their taxes annually.
  5. Get a benefit plan review annually if you are offering health insurance and other benefits to your employees unless you are an expert in ACA compliance and filing requirements. Another option is to outsource ACA processing and associated compliance to a third-party provider like your health insurance plan providers. Paying for a benefit plan review or outsourcing this function to a third party that specializes in this area will be well worth the cost of these services. Increased priority has been given to ACA filing & compliance starting in 2022 from the IRS and is evident with the number of agents they have assigned to this area for 2022.

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.

SEFA: What You Need to Know About Federal Expenditures

By | Audit, Nonprofit | No Comments
woman looking at paperwork in front of a laptop at desk

Is your nonprofit subject to a Schedule of Expenditures of Federal Awards (SEFA)?

Over the past several years, many nonprofits availed themselves of federal grants. These funds may have been related to the pandemic relief programs or separate programs intended to support the work of nonprofits. However, the increase in federal grant programs, and the number of nonprofits tapping into them, may mean that your organization is now subject to the Single Audit. To determine whether you now complete a Single Audit, you should first complete the SEFA.

What Is SEFA?

SEFA is a separate document required as part of an audited financial statement. It may be presented in the accrual or cash-based method of accounting.

If federal grants total more than $75,000 over an organization’s fiscal year, the organization is then subject to the Single Audit. SEFA must be completed as part of the Code of Uniform Guidance.

What should be included in the SEFA? According to the guidelines, federal expenditures to be included should be based on when the federal award is considered “expended.”

Determining which funds should be included is a bit more complex than looking over your awards and determining which came from federal sources. The Uniform Guidelines categorize the following to be included:

  • Grants
  • Cost-based Contracts under Federal Acquisition Regulations (FAR)
  • Cooperative Agreements
  • Direct Appropriations

Loans and Loan Guarantees

Loans and loan guarantees should also be considered under SEFA. The basis of determining them may be found in 2 CFR Part 200.502 as:

  • Value of new loans made or received during the audit period; plus
  • Beginning of the audit period balance of loans from previous years for which the federal government imposes continuing compliance requirements; plus
  • Any interest subsidy, cash, or administrative cost allowance received

Donated Personal Protective Equipment (PPE)

If your organization received a donation of PPE, you must account for its value. Calculate the fair market value at the time of the donation and include it as a footnote on the SEFA.

Note that the amount of the donated PPE should not count towards the determination of a Single Audit.

Donated Property and Donated Food

Donated property and food follow similar guidelines to PPE. The fair market value should be calculated at the time of the donation.

Determining Receipt of Income

The receipt of income date is determined for the SEFA by assessing the date by which the income from a federal source was received or used by the program.

Endowment Funds

Endowment funds from federal sources should be reported on the SEFA at the cumulative year-end balance if the restriction applies.

Medicare and Medicaid

Check with your state’s regulations or consult with a nonprofit accountant. In many cases, Medicare and Medicaid funding is not counted towards SEFA calculations. However, state guidelines may make your state an exception to the rule.

Presenting the SEFA

To ensure clarity and transparency, it is vital to report the information on the SEFA according to the Uniform Guidelines. The Guidelines specify that organizations should list each individual federal program by federal agency, and you can group a cluster of programs together. You must also note the name of any passthrough entities and identifying numbers if the organization received funds through a passthrough entity. The same applies if your organization passes funds through to another entity—you’ll be required to provide the total amounts provided to each subrecipient.

The totals on the SEFA are required for each federal program and Assistance Listing (AL) number (formerly the Catalog of Domestic Assistance, CFDA). If the AL number is not available, organizations can use another identifying number. Each cluster reported on the SEFA must also provide a total.

Lastly, footnotes: yes, they’re required. Nonprofits must disclose the outstanding balance of any loan and loan guarantees reported on the SEFA as of the end of the audit period. Additionally, organizations are required to disclose whether they utilized the de minimis indirect recovery during the year.

AICPA provides a checklist to help guide you through the complexities of SEFA preparation.

Preparing the SEFA properly requires a great deal of time and attention to detail, not to mention nonprofit accounting expertise. We highly recommend contacting us for assistance to ensure full compliance and the best preparation of these important documents.

Top Issues for Nonprofits in 2022

By | Accounting, Audit, COVID-19, Nonprofit | No Comments

These issues are top of mind for most accounting professionals, but especially for those leading the accounting function at nonprofits. This year appears to bring with it the continuing challenges resulting from the global pandemic as well as updates from FASB accountants need to know.

COVID-19 Issues Impacting Nonprofits

The economic impact of the government’s actions during the global pandemic are still not entirely understood. In March 2020, the government passed the $2 trillion CARES Act, and a year later in March 2021, the $1.9 trillion American Rescue Plan Act. If you’ll recall from previous articles, the CARES Act provided funds for the Paycheck Protection Program which used the Small Business Administration’s lending program to provide forgivable loans of up to $10 million per borrower. Qualifying businesses could spend this money on mortgage payments, payroll, or other business debts to continue operations.

Additionally, the CARES Act benefitted nonprofits directly by raising the limits on charitable deductions for both those who itemize deductions and those who do not. The government also raised the cap on charitable contributions for corporations. These actions were intended to increase cash gifts to nonprofits, strained by sudden increased demand for their services during the pandemic.

The response to the COVID-19 pandemic remains fluid as the situation continues to change. Many nonprofit accountants, however, still have questions about how to account for CARES Act funds, Payroll Protect Action loans, and more.

We’ve put together a list of resources to help you navigate any remaining questions from the pandemic response as they impact your nonprofit accounting.

Remote Auditing

Many nonprofits may still choose remote audits. To facilitate remote audits, incorporate the following best practices into your organization.

  • Utilize all available technology to share files with your auditors. This may include secure portals for sharing documents or videoconference. If your accounting and finance system allows for guest logins, you may be able to set up a secure login for your auditors.
  • Schedule additional video conferences to confirm supporting documentation. You may also wish to schedule video conferences in advance so that check-in dates are on everyone’s calendars.
  • Provide multiple contact methods to keep communication lines open. A secure instant messenger platform may be set up for the audit.
  • Build additional time into the auditing schedule to anticipate and accommodate potential delays in communication. Remote workers may be logging into their email at various times, which can lead to longer response times.
  • Be vigilant about cybersecurity, especially when sharing financial data.

Other Nonprofit Accounting Concerns

Nonprofits may also have concerns about other aspects of COVID-related accounting.

Cash management issues are at the top of many nonprofit accountants’ minds. Continue to build up operating reserves. Seek cost containment strategies that make sense for your organization.

If internal controls were relaxed during the pandemic, reinstate them when workers return to the office, even if only a handful are back. It’s important to ensure security and good internal controls even during challenging times.

This is also a good time to develop policies around remote work if your organization doesn’t already have them. Many organizations are finding that remote work policies are helping them attract more and better qualified candidates for open positions. A telecommuting alternative is an attractive benefit for many job applicants.

Lastly, be sure to keep your board and other advisors updated on your organization’s financial challenges, opportunities, and threats. Good communication is always essential.

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.