One of the most important fiduciary duties that the board of directors of a nonprofit organization is charged with is overseeing the financial governance of the organization. Hiring an independent auditor is an important element of this oversight process, keeping the nonprofit’s leadership accountable and ensuring financial integrity.
Managing an audit is typically delegated to a board committee. Depending on the size of the board, this committee may be responsible for all financial oversight, or just the audit process. Committees are customarily formed of a small group of board members with experience in the financial domain. They’re given authority by the wider board to manage the process and provide accountability for the audit.
It’s vital the members of this committee have a clear understanding of what to look for from the audit. Nonprofit organizations have very different audit requirements than for-profit corporations that board members might be accustomed to. Working with an auditor that understands the intricacies of nonprofit accounting is central to success.
The goal of any audit is to summarize the financial health of the organization, diagnose any issues, and outline recommendations for the improvement of the organization’s financial reporting and standards. To achieve this, the following steps are taken:
The board committee is responsible for hiring an independent auditor. They will issue a Request For Proposal, interview and vet firms, and ultimately determine who to hire.
Once an auditor has been selected, the first step is a planning meeting between the auditor and the nonprofit’s management team. For auditors, this meeting is an invaluable opportunity to learn about the accounting environment, explore existing internal controls and structures, and obtain an understanding of what has happened over the past year.
The insights gained from this meeting will determine the risk assessment that will be presented to the board committee during the entrance conference.
Following the initial planning meeting, the auditors will develop a risk assessment. This outlines the primary areas the audit will focus on. Nonprofits are exposed to different categories of risk than other organizations, so it’s important this risk assessment is tailored to the needs of the individual nonprofit.
Often, there will be an entrance conference between the board members overseeing the audit and the auditors. During this meeting, the auditors will present their plan for the audit and board members will provide feedback and raise any concerns they’d like the audit to investigate.
When the committee does not require a formal entrance conference, a conversation should occur between the auditors and the committee chair. It’s vital that the auditors and the committee establish and maintain an open line of communication to ensure a successful audit process.
In this phase, the auditors undertake the work of the audit process. Key activities include evaluating financial statements, responding to key areas of risk, and verifying accuracy in financial reporting to ensure they are in accordance with Generally Accepted Accounting Principles (GAAP) in all material respects.
Despite the name, fieldwork can be carried out remotely, and modern technology makes it easy for auditors to access electronic records and quickly query any issues with management.
Once the fieldwork has been completed, the auditors will begin to prepare the audit package that will be shared with the board. This package will contain the following:
Once the audit has been finalized, the auditors will formally present their findings to the board or a separate committee. They will highlight key issues, explain their recommendations, and provide answers to any questions the board may have.
Traditionally, this meeting was always held in person, but in recent times, the move by many organizations to a virtual meeting has been greatly beneficial. The increased accessibility and flexibility of virtual meetings has resulted in wider participation and higher levels of engagement among the board.
After the presentation has concluded, many committees will enter an executive session to discuss the findings of the audit and agree on next steps. While not every committee will do this, it’s a valuable forum to confidentially address sensitive issues such as management performance or insufficient internal controls.
Partnering with an auditor with expertise in the nonprofit industry is vital to the success of any nonprofit audit. There are many complexities that distinguish nonprofit accounting as distinct from for-profit accounting, from the way that different revenue streams are recognized to varying financial reporting requirements.
It’s often the case that auditors without the requisite experience in nonprofit accounting will make several errors. This often results in organizations making decisions based on incomplete or incorrect information, which can lead to major issues.
Even if the accounting numbers are correct, it’s likely the nonprofit is missing out on best-in-class internal processes, policies, and tracking systems that are being embraced by other nonprofits. Ultimately, this lack of sophistication holds the nonprofit back in achieving its overarching mission. Auditors who specialize in the nonprofit sector will be able to add significant value by sharing these best practices, and in some instances, connecting nonprofit leaders with each other.
An audit might be an open and shut process, but at Smith and Howard, we believe it’s important to maintain an ongoing relationship with the nonprofits we audit. Management––and board members––should be able to pick up the phone and proactively discuss any concerns with their audit team safe in the knowledge they won’t be billed for a quick check-in.
Smith and Howard is proud to offer a range of internal advisory services tailored to nonprofits. These enable boards to directly address any issues raised in an audit, elevate internal controls and processes to industry-leading standards, and ensure optimal financial performance on an ongoing basis.
To learn more about Smith and Howard’s nonprofit audit services, contact us today.
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