Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:
Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:
Many organizations receive grants and as expected, the federal government is concerned that the grants are spent properly, requiring audits of nonprofit recipients in addition to regular visits from the federal agency staff.
Instead of having a separate audit of each major grant, the Single Audit allows for one independent audit covering all federal grant contracts. It usually combines an audit of the organization and its grants. According to the National Council of Nonprofits, “a single audit covers the entire scope of the organization’s financial operations, ensuring that:
These single audits are required if the nonprofit has spent $750,000 or more in federal funds (This threshold is likely to change in the future). Single audits are performed by independent CPA firms, which usually carry out both regular and single audits within the same engagement, releasing the results in two different reports—one for the regular portion and another for the grant audit.
During a single audit, a CPA firm evaluates the fairness of the financial statements and the schedule of federal financial assistance, which contains information about grants. To this end, auditors assess risk by reviewing prior findings, internal controls, and usage of contractors. Also, CPA personnel should consider the materiality of the funds, with major grants often getting most of the attention.
The Super Circular clarifies that auditors are responsible for following up on any deficiencies, also called “findings.” The nonprofit is supposed to respond with a corrective action plan. All of these documents are forwarded to the appropriate government agency.
Management should be aware of the cumulative grant spending because as the organization gets closer to the $750,000 in annual grant expenses, it should start budgeting for the single audit. It doesn’t come cheap, and grant funds may have to be adjusted to include this cost.
Note that nonprofits may need to have a regular, less detailed audit to comply with grantor or state rules. For example, the states of Connecticut and Hawaii require the filing of audited financial statements of charities with an annual gross income of $500,000 or more regardless of federal funding. This audit is less detailed and cheaper than the Single Audit, but it needs to be done.
Excerpted from Nonprofit Finance: A Practical Guide — Second edition –available at Amazon — https://goo.gl/M563u9
One of the most common audits of a nonprofit organization is the one performed by an independent CPA firm, usually, every year. This work may be a requirement for many grantors who want assurance that the funds have been used properly. Auditors may ask detailed questions or require certain information that may not be readily accessible. However, there is no need to panic – be prepared and understand the process, which tends to be the same every year. Some tips below are to help you deal with the audit, which is one of those processes that many organizations go through, not just yours.
Tip #1– Sometimes staff with not much experience conduct the audit, so, try to help them and show them the way, or they may get lost and the audit may take longer. The idea here is to have a helpful, not a defensive attitude. It can be frustrating to have to do this every year with different audit staff, but it’s part of the game. The good news is that it’s common for a former team member in an audit to return the following year as a Sr. or Supervisor so that you won’t have to train auditor again.
Tip #2- Be sure to have all the reports and items mentioned on the audit list, often given to the client a few weeks before the audit. If you don’t have all, call the CPA firm and let them know. Maybe you have other reports or items that can be alternatives to what’s on the list. Your audit may also be postponed until you have all the documents. Most accounting firms schedule nonprofit audits a few months during the year, so you may have some flexibility there.
Tip #3– Hire temp workers or volunteers on an as-needed basis to get all the documentation done, prepare worksheets, and help with filing, copying, and other tasks. Some organizations also use temps to assist with the day-to-day activities while the accounting folks are busy with the auditors. Your accounting staff may not be able to do their regular jobs and at the same time give auditors the attention and information they need. So, help at the right time can lessen the stress. Usually, having temps do a specific task, such as entering invoices for payment, works the best because the work is repetitive and training time is minimum. If you’re lucky to have an accountant on your board or as a volunteer, you can give him or her more involved financial tasks.
Tip #4– Communicate often with the manager responsible for the audit to identify issues or bottlenecks. Sometimes auditors use too technical language that the nonprofit staff may not understand and panic. Or maybe there’s a problem in finding information or explanations for certain transactions that you may be familiar with. The goal is to have a quick, clean audit with no major issues or conflicts. The quicker you know of problems, the smoother the process will be. Make a point to contact the manager at least once every few days.
Tip #5- Notify everyone in the organization of the upcoming audit, since auditors may need to talk to people in other areas of the nonprofit, such as programs and HR. Warn managers and staff that they may need to present certain things to the auditors, including showing them confidential HR and payroll files and reports. Since auditors usually request the same items and calculations, such as vacation accruals every year, the requests shouldn’t be that surprising. But it’s always good to let people know beforehand.
Other Considerations -Freaking out with questions asked by auditors makes no sense— usually, they follow a pre-set program that may not fit your organization 100%, so you can explain to them the situation in a respectful way and offer alternatives. Ask the auditors what goals they’re trying to get at. Maybe they are looking at mitigating a risk that doesn’t really apply to your nonprofit, so let them know about it. CCH – Wolters Kluwer Audit guides, for instance, are very popular with many CPA firms that use their audit programs to guide them through this process. If you’re interested, you could buy the guides, even if it’s expensive.
You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9
Not to be too paranoid here, but I just read an article about the Simi Valley Community Foundation whose former executive director stole over $45,000. According to the news, she forged a second signature on the checks used to pay her own mortgage. Sadly, this embezzlement cost the organization its reputation as it had to stop operations, at least for now. A total disaster.
It’s not clear how exactly the theft was discovered, but board members noted something odd, hired a forensic accountant to review the records, and went to the police with evidence of embezzlement. So, I give credit to the board for finding this out, but this theft had been going on for awhile.
So, what can a board do to prevent or identify financial fraud faster?
1- Knowledge –Get people on the board who understand financial matters and can ask the right questions. The board cannot have the obligation to fundraise and provide oversight only. Board members should have different backgrounds with least one person having the education and experience to really understand the information provided and ask good questions. Had this person been on the board of this Simi Valley nonprofit, the fraud may have been identified earlier.
2- Online Access –Have someone from the board check on the bank accounts of the organization online. He or she should review checks and deposits, looking for checks that don’t look right. Just having a policy about this review may deter fraud. Employees may think twice before forging signatures or doing something odd when they know that someone would be looking at the bank transactions regularly.
3- Pay attention –Listen to complaints from staff, donor, and vendors. Oftentimes, information that could be construed as gossip can be useful in pointing you in the right direction. People talk. Even though it’s not clear how the board of the nonprofit became aware of something wrong, my bet is that someone saw something and talked about it. Some nonprofits have started using hotlines for people to report possible fraud anonymously, a very good idea.
4- Variances –Pay attention to the actual vs. budget reports. Looking at this fraud, one may wonder how the $45,000 theft was classified and shown on the financial reports. The amount didn’t show up all at once, but it was likely classified as a budget item. So, if an overage is noted, the board should ask for back up documentations, such as bills.Talk only doesn’t explain financial issues.
5- System reports –Review new vendor/change vendor reports once a month to question any odd new vendor or changes. In this situation, the bank where the mortgage was paid to would have been added at a certain point to the accounting system. Had this report been reviewed, it may have flagged the bank as an odd vendor. Some accounting systems can send an email whenever a new vendor is added or changed, making this task automatic.
6- Bank reconciliations — Check on bank reconciliations, making sure they are done monthly. Keep an eye on deposits that are recognized in the accounting records, but don’t seem to be in the bank. Also, look at the detailed outstanding checklist. This can be done online using the accounting system and can be emailed to someone at the board. If a check shows up at the bank, but not on the accounting records of the organization, it could be a red flag.
7- Self-reliance –Don’t count on auditors to notice embezzlement. Audits are designed to assure reasonableness of financial statements and they may identify fraud, but not always, especially when done by management. When something seems wrong, not it, and don’t wait for the auditors to figure it out. Insiders are the first people to note things that don’t seem right.
8- Education — Educate all employees on fraud and embezzlement. Nonprofits should have this topic on its policies and procedures documentation and not be embarrassed about it. Fraud happens not just with stealing funds, but in other areas as well, such as equipment theft and overtime pay without authorization. Just showing this awareness and clarity over fraud may prevent it in the first place.
It’s a shame that nonprofit boards must be always on alert for fraud and embezzlement, but that’s the reality of the situation. Once a scandal happens, it’s hard for the organization to regain the trust and respect of donors, making it hard to move forward.
So, it’s time to talk about this issue openly and set up written policies and procedures with tasks specifically designed to prevent and identify fraud and theft. The ideas presented here won’t assure boards that they are safe from this issue, but are steps in the right direction. Each organization is different and I’m sure many will need more control features than the ones presented here. The crucial point here is that fraud signs cannot be ignored by the board.
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