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Three Things to Look for Before Your Next Audit

May 21, 2018

Not-for-profit organizations have complicated regulations to follow regarding their annual independent financial statement audits. Not only are regulators looking for potential issues, but your audited financial statements are also available to the general public, donors, and in some cases, beneficiaries. So it's important to get it right.

Not-for-profit organizations have unique reporting requirements, including providing information on the use of donor funds and the management of endowment funds. Auditors will be looking for evidence of fraud, noncompliance with donor requirements, and whether the organization is following its tax-exempt mission.

Failing to follow audit regulations can mean significant consequences for a not-for-profit organization. Here are some things to look for within your own organization before your audit begins.

Protect Yourself from Fraud

The Association of Certified Fraud Examiners (ACFE) Report to the Nations on Occupational Fraud and Abuse 2018 Global Fraud Study reported that fraudulent activity exceeded $7.1 billion in losses, with the average loss due to the frauds averaging $2.75 million. Approximately one in four of the cases in the study occurred in the not-for-profit and governmental arena. There are certain precautions that not-for-profits can take to stay ahead of fraud and help protect their organization.

To avoid a huge loss—and issues with your annual financial statement audit—be sure to clearly document separation of duties in your organization's internal controls. That means making sure one employee is not responsible for signing all checks, selecting vendors and disbursing funds. Spread those duties across the organization for solid checks-and-balances.

If you're running a gift shop, be sure the inventories listed on the balance sheet match the physical inventory in your shop.

And, be sure to check yourself on a periodic basis. Are vendors being paid like they're supposed to? Are there unusual patterns in vendor invoices? These are all questions auditors will be asking—and questions your organization should be asking itself regularly.

Track and Record All Donations

Auditors are there to check every aspect of your not-for-profit's recordkeeping, including tracking of donations received and pledged.

Make sure every donation can be matched to a donation form and a bank deposit entry. Failing to properly track donations may result in a loss of your 501(c)(3) tax-exempt status and can come with federal penalties. (Not to mention good bookkeeping is also the best practice for tracking your programs' successes.)

Auditors will be looking for proof that donated funds are being used for their intended purpose. If you receive donor-restricted funds, be sure they are properly labeled and disclosed in the financial statement.

Having a good record-keeping system in place will help your organization in the long run, and, when it comes time for an audit, provide quick and easy proof that you're properly managing your money.

Follow Your Own Mission

It should go without saying, but make sure your not-for-profit organization is following its own mission and can provide evidence of that. Auditors will look to be sure your organization's activities and expenditures align with your not-for-profit mission statement as filed on the Internal Revenue Service Form 990, Return of Organization Exempt From Income Tax.

Much like how they investigate for fraud, auditors will look to see if there are controls in place to ensure your activities follow your organization's tax-exempt mission. Part of this will include a review of expenditures. Not-for-profit organizations may risk losing their 501(c)(3) tax-exempt status if they have too much income from activities that are unrelated to the not-for-profit mission statement. Auditors will conduct a review of unrelated business income to determine if it is appropriate for the size of the organization.

For More Information

If you have any specific comments, questions, or concerns about your next audit, please contact us.

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