Offering additional assurance and peace of mind, independent audits may also boost your donors’ confidence, while helping to promote your organization’s mission.
What are your strongest motivations in life? What thrills you and energizes you? What target are you aiming at for success? Many of us challenge ourselves with these questions daily.
Not-for-profit organizations are born from answering such questions. They are a blessing to society because they are founded upon a dream of service and giving. Managers of nonprofit organizations are charged with the ardent task of consistently promoting the underlying passion and beliefs of the organization to its employees, the community and the individuals it serves.
One of the many realities of operating a not-for-profit organization is the fact that finances must be managed and accounted for. In many instances, this involves a financial statement audit, which may be required by the organization’s board of directors, a sponsoring organization or a granting agency.
The word “audit” is often misunderstood and almost always associated with an Internal Revenue Service (IRS) audit. As a result, it is often perceived as a necessary but unpleasant event, like jury duty or going to the dentist. The process is thought to be inherently negative, as though someone is coming in just to find problems. However, I would like to propose that the word “audit,” in the context of which I am speaking, is an exciting word! “Why?” you might ask. Because a financial statement audit performed by an independent CPA firm delivers tremendous benefits to your nonprofit’s mission!
An audit provides additional assurance and peace of mind that your financial reporting is accurate and transparent. This is extremely important to donors and can boost their confidence that the dollars they give are being handled appropriately. It also enables management to make more informed, accurate decisions impacting the direction of the organization’s mission.
Equally important, an audit means collaborating with a team of financial experts who can bring “outside” insights and experience into your organization. A dynamic CPA will seek to understand who you really are and add value through the audit process, as well as beyond the audit.
While audits are often necessary, it’s not uncommon for a nonprofit organization to be free of audit requirements. In such instances, should you engage to have an audit performed? Does it make sense to have at least some level of testing done by an outside party to add financial accountability? It really depends on the situation. You should be aware there are many options available to you, and they can be tailored to your specific needs.
Those charged with financial oversight (the finance committee, for example) may perform “internal audits” themselves, yet desire to have external procedures performed to supplement their own process of financial accountability. Such an arrangement can be scaled to meet a specific need and a specific budget, without resorting to a full-blown audit. In addition, there is flexibility in timing; the procedures can be done as a one-time engagement, every several years, or on a recurring basis. The following are some of the most common types of consulting services a CPA firm can offer to help your nonprofit organization achieve its financial goals:
- Examine the organization’s internal control structure. Internal controls are the checks and balances in the accounting system designed to prevent or detect misstatements as a result of fraud or error. Every organization has some level of internal controls. One example of an internal control is making sure a check-signer does not also reconcile the bank account or have access to making entries in the accounting system.
Ensuring internal controls are adequately designed and implemented is extremely important. Often times, smaller organizations vest overlapping responsibilities in one individual, and additional review controls should be in place to prevent or detect fraud or errors in financial reporting. An examination of internal controls can identify areas of weakness or vulnerability in the accounting system and provide recommendations for strengthening internal controls.
- Review a sample of year-end bank and payroll reconciliations. Having an external party review these reports provides accountability through a third-party review. Reconciliations should be reviewed on a recurring basis for accuracy and proper recording.
- Review a sample of cash receipts and cash disbursements transactions. Testing a sample of transactions provides reassurance that activity is being properly reported and filed with supporting documentation. A cash receipts journal and cash disbursements journal can be used to select a random sample of transactions for which support is pulled and reviewed for propriety.
- Conduct a search for unusual activity through data-mining, vendor analysis and analytics. Software can be used to analyze general ledger activity for the entire year. This information can be sorted, summarized and analyzed in many meaningful ways to generate statistics specific to your organization. Common analysis includes identifying unusual journal entries, isolating total payments by vendor for evaluation, and analyzing cash flow management.
These serve as several options to consider, and remember: any number of procedures can be adapted to fit your individual goals. Talk to your CPA and determine what an independent audit or consulting engagement may be able to offer your organization. iBi
Philip Schmidt, CPA, CFE is a manager in the Audit Department at Heinold Banwart, Ltd. He can be reached at (309) 694-4251 or firstname.lastname@example.org.