Twelve steps for an audit ready nonprofit
This blog will discuss the twelve items to address before a nonprofit audit to strengthen an organization’s preparedness.
Audits negatively affect other industries, but things are a bit different in the nonprofit sector. Audits are an extremely important tool for nonprofits to track and maintain the current state of the organization’s capability to follow through on its mission statement. Without audits, nonprofits would quickly lose touch with how the organization might shift its focus away from programming and get lost in the engaging nature of running the business elements of the nonprofit. Luckily, not only are many nonprofits required to have an independent auditor review their organization, most encourage it to maintain their status within a chosen community.
How can a nonprofit ensure it’s ready for an audit? There’s a laundry list of items that your Not-For-Profit can address before end-of-year tax filings to be audit ready. Here is a list of the most important of those items:
- Ensure bank accounts are fully reconciled with any stale or uncleared checks reviewed
Any outstanding funds or deposits can raise suspicion when being audited, so it’s essential to ensure that all items within an organization’s bank account have been accounted for. It’s also critical to track and ensure that no outstanding checks are associated with your nonprofit, as an uncleared check could affect revenue allocation percentages.
2. Review grants and other receivables to ensure they are fully collectible and to ensure cash deposits have been appropriately deposited
It is also important to review if any grant or donation income has restrictions placed on it. These restrictions can be limited to where and when a donation can be used to restricted in perpetuity, which is usually done to generate investment income for an organization. This might also mean that a certain allotment of cash assets can only be used towards a particular program and can’t be used to bail out an organization experiencing a financial crisis. If any of these restrictions apply to your grants, they must be noted.
3. Reconcile investments to statement and prepare standalone investment return reconciliation
Another critical element of audit preparation is managing an investment account for a nonprofit organization that falls under a fiduciary duty called the Duty of Care. An investment policy should have already been developed for an organization that plans to use investments to increase assets.
4. Ensure all fixed asset additions have been capitalized, ensure all disposals are recorded, and depreciation posted
It’s important to review the IRS’s guidelines on depreciation, as it varies from asset to asset. For example, land does not typically depreciate, but equipment like a computer be designated a lifespan of three years, depreciating each year until that asset has a value of zero.
5. Review payables to ensure accuracy
Any discrepancy between agreed payables and what was actually paid could imply fraud, so every payable needs to be accurate with the amount agreed upon so that all funds are accounted for.
6. Reconcile credit cards
Ensuring that credit card transactions match your ledger is another indicator that your organization works within the appropriate metrics of your nonprofit category.
7. Book prepaid and accrued expense adjustments as required
This may not be necessary for your organization, but if it is, it recognizes wages earned but not yet paid.
8. Ensure a schedule of net assets with donor restrictions is maintained with support for releases
This is with strategic donations to guarantee that funds donated are used for their intended purpose. Donor restrictions are frequently related to investment strategy but can also sometimes be to help support specific programming a nonprofit has developed. Regardless of the situation, your documentation must respect and reflect restrictions.
9. Review statement of activities year on year to determine if fluctuations are in line with expectations or whether adjustments need to be made
This is an organizational review opportunity. We expect our year-over-year activities to fluctuate slightly, but how much fluctuation occurred? Did it have an impact on the finances of your nonprofit? What changes need to be implemented to make sure these fluctuations have a positive impact on the organization? By reviewing these changes during an audit, you have the ability to make adjustments for the next fiscal year where necessary.
10. Ensure payroll expenses align to payroll reports (YTD etc.)
Nonprofits who underpay or misreport payroll will be held under significant scrutiny, as an act of that sort would directly violate a majority of nonprofit mission statements. Payroll accuracy is important, or an organization’s 501C status could be challenged.
11. Have all grant agreements, donor letters, organizational documents, etc. all ready and available for auditor review
This is simply good housekeeping, as an auditor who spends most of their time finding the documents that should have been on hand from the beginning is likely to be annoyed and more expensive than you’d prefer. Whether you’re still holding onto paper filing or have adopted the ways of cloud-based storage, having easy access to all documentation will streamline your audit process.
12. Have all 1099s, W2s, payroll tax forms, etc. available
Another example of good housekeeping. Have any documents an auditor might think they want to see readily available to increase audit efficiency.
Twelve steps completed
By reviewing this twelve-point system and following all of its guidelines, your organization will be prepared for any curveball an auditor may throw your way. The audit preparation process can be time-consuming and confusing, and for those of us who would instead leave something like this to professionals, MBSATA has you covered. With accounting experts advising you through your nonprofit audit process, you can spend more time working on the parts of your organization that make a difference and less on the financial requirements to maintain your organizational status.
Want to learn more? Join our upcoming webinar Ask an accountant – How can I get my nonprofit audit ready? Register now.