Category

Nonprofit

Auditing Challenges: No Clear Answers for an Unusual Year

By | Audit, Nonprofit | No Comments

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.

 

 

Tips to Prevent Cyber Crime at Your Nonprofit

By | cyber security, Nonprofit | No Comments

According to Fintech News, cybersecurity attacks have increased 80% over the past year. If you think only big companies or for-profit companies have to worry about cybercrime, think again. Criminals often target nonprofit organizations because they know that many lack the internal IT resources to prevent an attack.

Don’t fall victim to a cybercriminal. Here’s what you need to know to stay protected.

Know the Risks, Upgrade Your Defenses

In order to protect against cyber-attacks, it’s important to know where the potential risks lie in your organization. Common ways in which criminals attack computer systems include:

  1. Unsecured WiFi: Your office WiFi may have strong password protection, but if you allow employees to telecommute, their systems may be open to attack. During the pandemic, many nonprofit organizations allowed their employees to work from home. Some employees have secure networks but not all do. An unsecured WiFi network or one with a weak password is ripe for the picking by cybercriminals who can easily grab valuable passwords and data.
  2. Phishing emails: Phishing emails are disguised to look like they come from a reputable company such as your bank or credit card company. However, when you click on the link, they direct you to a site that captures your login information.
  3. Phishing phone calls: A new angle on the phishing email is the phishing phone call. In this instance, a caller contacts an assistant, usually an executive or administrative assistant, claiming to be from a reputable company and asking for the CEO or another chief executives’ login information. Many assistants have such information handy, especially if they respond to emails or schedule meetings on behalf of an executive. If this sensitive information is given out, the thieves use it to access critical systems.
  4. Trojans, spyware, and malware: Trojans, spyware, and malware can infect a computer just by casually browsing an infected website or accidentally clicking an infected link. They can then be passed along unintendedly to other computers, enabling hackers to access systems or hold data for ransom.
  5. Failing to update software: Software patches, plugin updates on WordPress websites, and similar updates aren’t nuisances. Companies release them to patch known problems in the coding. Failing to update software is like leaving the key under the doormat and hoping a burglar won’t think to look there.

Even if your organization is small, you can still take steps to prevent an attack from any of these areas.

5 Ways to Protect Your Organization’s Data

You don’t need an army of cybersecurity experts to protect your organization’s system. Most nonprofits can take the following steps on their own to greatly lower their risk of cybersecurity issues.

  1. Upgrade security software: Invest in better security software and take the time to update it when prompted by the manufacturer.
  2. Upgrade hardware and software: Older computers and software are more easily hacked than newer products. Set aside budget for updates to your hardware and software each year.
  3. Avoid donated hardware: Although donated computers may be a nice gift, unless you know the donor and can have a security expert wipe them clean, avoid using donated equipment.
  4. Use strong passwords: Insist that all employees use strong passwords, and make sure everyone changes their passwords monthly. Strong passwords typically consist of random arrangements of lowercase and capital letters, numbers, and symbols.
  5. Train your employees: Many cybercrimes occur due to employee mistakes, such as using weak passwords or falling for a phishing scam. Teach your team what to look for to spot phishing emails; misspelled words, blurry logos, company URLs that don’t look quite right. When in doubt, close the email and open up a separate browser to log in and check for messages. Training is often enough to prevent many cybercrimes.

Nonprofit organizations have fewer resources to combat cybercrimes. But that doesn’t mean they can’t take steps to prevent crime. Just as even the poorest homes have locks on the doors to keep thieves out, you can put virtual “locks” on your data.

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.

Critical Issues Facing Nonprofit Boards

By | Accounting, Nonprofit | No Comments

Nonprofit boards have duties of care, loyalty, and obedience (or trust) to their organizations. How these duties are carried out may depend upon the organization and the work that the board completes, but it almost always spans important areas such as compliance and governance. The following critical issues facing nonprofit boards are sometimes overlooked in the wake of the COVID pandemic, but all are important to the long-term success of an organization.

Tax, Accounting, and Financial Compliance Issues

Even though nonprofits may have tax-exempt status, tax issues are still something that nonprofit boards must be knowledgeable about in order to manage effectively. Boards must be aware of:

  1. Unrelated business income tax: This is a tax imposed on a nonprofit that is not related to the nonprofit’s primary revenue-generating purpose. Boards must be aware of these activities and ensure that positions are well-documented.
  2. Worker classification: A critical compliance issue for nonprofits is the proper designation between employees and independent contractors. Under-counting employees by hiring (and treating) independent contractors as if they were employees can be a significant issue for nonprofits.
  3. Executive compensation: Executive compensation remains a hot-button issue for the public, and one that should be kept in mind by nonprofit boards as they review salary and compensation packages for executives.
  4. Financial reporting: boards are responsible for understanding the organization’s mission and ensuring that the organization’s funds are used appropriately. This means that, at a high level, funds are used to support the organization’s mission. Members must take the time to review financial information and understand the financial ramifications of major decisions.
  5. Clear documentation: Lastly, boards must note anywhere that audited financial statements are shared such as GuideStar and Charity Navigator. They should take care to add any financial disclosures or additional information that may be needed and to alert auditors of any known issues or needs pertaining to financial disclosures.
  6. Revenue recognition: FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, effective in 2018, should be reviewed by boards and understood to ensure consistent and careful compliance.

Nonprofit Governance Issues

Boards also must exercise a duty of care for governance issues. Some issues that may occur include:

  1. Conflicts of interest: Both perceived and actual conflicts of interest should be taken seriously and addressed. Perceived conflicts of interest can be just as harmful as actual ones, and may tarnish a nonprofit’s reputation and goodwill with the public.
  2. Form 990: IRS Form 990 poses good questions that the board members should consider when thinking about governance issues. It’s a useful document to help the board remember important governance issues.
  3. Strategy: Nonprofit boards are key drivers of organizational strategy. It is incumbent upon the board to work with chief executives to develop and drive the strategy and messaging for the organization. To do so ensures continuity of mission and message and helps position an organization effectively.

How Healthy Is Your Board?

Having a seat on a nonprofit board is an honor, but it is also a lot of hard work. Understanding the nonprofit environment, basic accounting and financial information, ensuring the bylaws and rules regarding the nonprofit’s operations and management are followed, and working with key staff members to position the organization for strong and steady growth is the equivalent of a full-time job.

But for board members who believe in the organization’s mission, it is a labor of love. How does your nonprofit board measure up?

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

By | Audit, Nonprofit | No Comments

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.