Audits can be a daunting process for any organization, but medium-sized nonprofits face unique challenges. Ensuring financial integrity and transparency is crucial, not only for compliance but also for maintaining donor trust and securing future funding. At Chazin & Company, our extensive experience with nonprofits of various sizes has allowed us to identify common pain points and effective solutions to help midsize nonprofits navigate the audit process successfully.
Understanding Nonprofit vs. For-Profit Accounting
One of the primary challenges we see in nonprofits is understanding that there are unique differences in nonprofit accounting. Nonprofits operate under some different financial reporting standards and principles than for–profits do, which has an impact on the audit process. Revenue recognition is always an area where auditors put their focus; however, it has entirely different implications in a nonprofit. Terms like “restricted contributions ” are exclusively used in the nonprofit sector and require a deep understanding of their implications for financial recording. As Chazin’s Maria Injic, CPA, MBA, Director of Client Services, emphasizes, “When it comes to nonprofit accounting, there are a variety of types of donor–restricted funds. Some may be permanently restricted, some may be temporary, and the restrictions vary such as the time when they will be spend, or the purpose of what they can be spent on.” Ensure your accounting team is well-versed in these differences before audit time to avoid significant audit adjustments later.
Key Audit Challenges
1. Documentation and Record-Keeping
- Challenge: Nonprofits often struggle with maintaining thorough and organized financial records. This can lead to discrepancies and incomplete documentation during an audit.
- Solution: Implement robust record-keeping practices. Regularly review financial statements to ensure accuracy.
2. Internal Controls
- Challenge: Limited staff size often results in inadequate division of tasks, increasing the risk of errors and fraud.
- Solution: Strengthen internal controls by segregating duties where possible and implementing proper reviews and approvals. Consider outsourcing certain functions to ensure proper checks and balances.
3. Compliance with Donor Restrictions
- Challenge: Properly managing and applying funds according to donor restrictions is crucial. Mismanagement can lead to audit findings and potential loss of funding.
- Solution: Implement a tracking system for donor-restricted funds. Regularly review fund usage to ensure compliance with donor intentions.
4. Revenue Recognition
- Challenge: Recognizing revenue in a way that is not in compliance with Generally Accepted Accounting Principles (GAAP) and results in significant audit findings.
- Solution: Stay updated on the latest revenue recognition standards for nonprofits. Ensure your team accurately records revenue, especially for multi-year grants and conditional contributions.
5. Board Governance and Engagement
- Challenge: Ensuring that the board is engaged and informed about financial practices can be challenging, especially in this post-pandemic time.
- Solution: Regularly update the board on financial matters and engage them in the audit process. Conduct board training sessions on financial oversight and compliance.
Why This Matters
Understanding where your money is going and ensuring proper financial management is critical. Failing to address these challenges can result in significant audit adjustments, which indicate leadership has been managing to inaccurate financial data all year and may have made decisions that aren’t in the best interest of the organization because of that. Additionally, clean audits are essential for maintaining donor trust and securing future grants.
Clean Audits: What They Mean and How to Achieve Them
Achieving a clean audit opinion is crucial for demonstrating financial integrity. Here’s how you can prepare:
- Review vs. Audit: Understand the difference between a review and an audit. A review offers negative assurance (no significant findings were noted). Its scope is far less than the scope of an audit. An audit provides positive assurance, indicating that the auditor believes the financials are materially correct and in compliance with GAAP. Note that the purpose of an audit or review is not to detect or prevent fraud.
- Engage Experts: Consider engaging accounting firms like Chazin & Company, who specialize in nonprofit accounting. Their expertise can help you navigate the complexities and ensure a smooth audit process.
The Benefits of Clean Audits
Clean audits indicate that leadership has received accurate financial data throughout the year, which has allowed them to make appropriate decisions for the organization and to stay on mission. They also inspire donor confidence and assist in securing grants and other funding opportunities.
Steps to Ensure a Clean Audit
1. Start Early
- Begin preparing for the audit immediately after your year end. Be proactive and implement a formal month end close process. If done correctly, this will produce materially correct financial statements monthly that should be reviewed by leadership and the board. Formal month-end closing processes simplify the audit process but also ensure fiscal health, support the sustainability of your organization, and keep you focused on meeting your strategic goals.
2. Understand Audit Requirements
- Familiarize yourself with the specific requirements of the audit. Know what documents and records will be needed and ensure they are readily available.
3. Implement Strong Internal Controls
- Develop and maintain strong internal controls to prevent errors and fraud. This includes segregation of duties, regular internal reviews, and proper oversight of financial transactions. You can have strong internal controls even if you only have one person doing your accounting.
4. Conduct Regular Reconciliations
- Reconcile all accounts regularly to ensure that financial records are accurate and up to date. This includes bank statements, donor records, and grant accounts, to name a few.
5. Train Your Team
- Ensure that your accounting team is well-trained and knowledgeable about nonprofit accounting standards and audit requirements. Regular training and professional development are key.
6. Engage Your Board
- Keep your board of directors informed and involved in the financial oversight of the organization. Regular financial updates and training sessions can help ensure their engagement and understanding.
7. Review Revenue Recognition Policies
- Ensure that your revenue recognition policies are in line with current standards. Accurate recording of grants, donations, and other income is necessary for a clean audit.
8. Use Professional Services
- Consider engaging professional accounting services, like Chazin & Company, to assist with audit preparation and ensure compliance with all standards and regulations.
How Chazin & Company Can Help
At Chazin & Company, we specialize in providing remote accounting services tailored to the unique needs of nonprofits. Our team of experts can help you implement best practices, prepare for audits, and achieve clean audit opinions. While this blog post aims to provide valuable insights, we are here to support you with any specific challenges you may face.
For more information on how we can assist your nonprofit, visit our website or contact us directly. Let us help you ensure financial integrity and achieve your mission with confidence.
By taking these steps and understanding the importance of clean audits, your nonprofit can navigate the audit process successfully and leverage it to secure future funding and maintain donor trust.
Chazin & Company
With over 19 years working exclusively with nonprofits, we pride ourselves in having a unique understanding of nonprofit accounting needs. We believe that nonprofits deserve personalized, quality service and should not settle for a one-size-fits-all approach. We collaborate with you to provide a fully virtual and customized solution that is not only cost-effective but also strengthens your accounting function. We offer a team of industry experts at your disposal to provide advice, leading technology, and to supplement existing staff to improve efficiency and compliance.