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 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.