A New Audit Standard Affects Me??? Really?

Many nonprofits are subject to annual audits. Although they can be challenging, they are often required for one or more reasons. A byproduct of that requirement is that audit standards can and do change and those changes can and do impact your organization. This year is no different. A new “Statement on Auditing Standards (SAS)” is now required for fiscal years ending after December 15, 2021 that will affect your audit preparation and possibly your organization. 

The new SAS 134 is creating changes to the audit report, some that have nothing to do with your organization; one, however, most certainly does.   

The new audit standard now clearly states that management, and auditors, have the responsibility to conclude whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an organization’s ability to continue as a going concern for a reasonable period of time.

What’s a Going Concern? 

“Going concern” is a term used to indicate a business or organization will likely continue operating indefinitely. When auditors address a “going concern” in their audit report, it usually means there is risk the entity under audit will cease to exist within a 12–18-month period, due to financial issues. 

With the new audit reporting requirements, management is going to have to evaluate an entity’s ability to continue as a going concern and document it for the auditor’s workpapers. 

It is likely you have thought about this and even talked about it amongst your team, but you may not have formalized it. If not, now is the time to do that. 

A going concern evaluation is a two-step process: 

1. Assess if substantial doubt about an organization’s ability to continue operating is even a question.  
2. If it is, assess if substantial doubt exists or, said another way, assess how likely it is that the organization will have to close its doors.  

Step ONE: Assess if substantial doubt about an organization’s ability to continue operating is even a question.  

To do this you must ask yourself what factors would lead to concern about an organization’s ability to continue operating. There could be one or more of many, such as: 

1. Year over year losses. Losses impact cash flow. Year over year losses reduce cash, sometimes to dangerously low levels. 
2. A budget that continues to project a loss. A budgeted loss on top of historical losses will reduce any cash reserves. As an aside, nonprofits can show a profit and should, if they want to sustain themselves. 
3. Limited cash reserves. If an upcoming loss is budgeted and cash reserves are not sufficient to cover that loss, that could be indicative of a going concern issue. 
4. No access or limited access to debt. If the organization has limited cash reserves and they’re projecting a loss, no access or limited access to debt will undoubtedly create a going concern issue. 
5. Other issues, which could include: 
   • The death of a major donor who has not bequeathed a significant gift. 
   • The loss of a key member of the Advancement Team. 
   • Continuing COVID impacts. 
   • The expiration of significant grants that may not be renewed. 
   • Continuing declines in contributions. 

Keep in mind this step does NOT take into consideration the potential mitigating effects of management’s plans that have not yet been fully implemented. Look at conditions and events the way an auditor would. Are they serious enough to shut down the entity? 

Step TWO: Assess if substantial doubt exists or, said another way, assess how likely it is that the organization will close its doors.  

You’re not profitable. You don’t have enough reserves to get you through 12-18 months. Donations are dwindling. COVID continues to impact your operations. It’s time to assess if substantial doubt exists because the conditions are certainly there. In making this evaluation, significant judgment is needed because no two organizations have the same fact pattern or circumstances, even if they operate in the same industry.  

To assess if substantial doubt exists, it’s important to ask yourself if the organization’s leadership has acknowledged the conditions, developed mitigation strategies, and implemented plans to ensure the viability of the organization.  

These plans could include:   

1. Reducing expenses. 
2. Securing a loan. 
3. Meeting with larger donors to ask for their help. 
4. Identifying new grant opportunities. 
5. Changing the business model. 
6. Creating new fundraising opportunities. 
7. Selling assets. 
8. Contacting donors who made restricted contributions and asking them to remove the restrictions. 

If your leadership team has not done this, the time is now. It has now become an essential step in audit preparation.  

If you need help addressing and documenting compliance with this new audit standard, our team of expert nonprofit accountants can help! Reach out to schedule your free consultation.