There are few words in the American lexicon that instill more fear than the word “audit”. While audits are a standard practice among nonprofits, required at different intervals to provide fiscal transparency and fiduciary accountability, we help our clients to understand the importance and value they can provide. As part of our pre-audit preparation services, we educate nonprofits on the best practices to follow throughout the year so that the overall process becomes much less stressful and impactful. Here’s what we advise:
First, it all comes down to standards. Any nonprofit should start audit preparation by ensuring that effective accounting policies and procedures are in place. In addition, the fiscal responsibilities and processes should be clearly delineated. These standards should be documented so that any outside auditor can quickly and clearly ascertain whether ongoing transactions are actually in compliance with the intentions of the organization. Associated job responsibilities should also be worked out and captured so that expectations can be set and accountability can become manageable. Ultimately, one of the most valuable aspects of documenting standards is that it forces organizations to think through their operations, plan for contingencies and define the ideal scenarios for operation. The fact that they can then be referenced by both internal and third-party consultants for purposes of ongoing management becomes an incredibly valuable bonus that can make a significant difference in the regular auditing process.
Once policies, procedures and responsibilities are clearly defined and communicated, nonprofit organizations should consider performing regular internal audits on the most commonly identified problem areas. Working to accurately track and verify operational expenses is one of the best ways to avoid the common issues that are discovered during audits. By alerting everyone to internal auditing expectations and engaging in a “dry run” to prepare proper documentation and ensure compliance, organizations do themselves a great service. Our clients always tell us that the time and energies invested in internal “testing” pay off in dividends year after year.
The next best practice involved in preparing for a successful audit is preparing a realistic budget expectation. This includes documenting all sources of income, setting up a master schedule for contract receipt and reporting and accounting for all potential revenue streams, then developing an operating plan to work within their limits. We advise our nonprofit clients to be conservative in their funding estimates as it generally forces them to operate according to a leaner and more realistic operating scope.
Obviously nonprofit directors will want to develop some process or mechanism for monitoring expenses and comparing them to the prepared budget to ensure that acceptable thresholds are not exceeded. While the frequency and complexity of this analysis will depend on the size and mix of funding sources (as well as the number of staff/contractors affecting expenditures), we recommend a minimum quarterly review between managers and department heads. Regular interim reports can help to fill in the gaps and avoid significant budget variances between checkpoints.
As a side note here, one of the other major issues that we encounter with our nonprofit clients is the failure to properly segregate non-cash donations in the general ledger. Clearly differentiating between donated services, materials, and/or equipment and cash donations is critical to a quick and successful audit.
Our final piece of advice to nonprofit organizations as it relates to successfully audit preparation is to increase board oversight. Considering the business experience and intellectual capital sitting on most nonprofit boards, we have found that involving the board early and often in audit and finance committees helps to increase the level of accountability and budget adherence. Though it may seem to complicate operational matters, requiring board approval can actually streamline every aspect of your organization, especially the fiscal aspects.
For more information or advice on how you and your nonprofit organization can better prepare for audits, contact Lescault and Walderman at 866-496-2042.
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