10 Steps to Prevent and Detect Financial Audit Issues for Your Not For Profit
Not-for-profit organizations are subject to having an annual financial audit performed. There are certain financial audit issues that can occur during the process. By being aware of these issues not-for-profits can take the steps to avoid them. If the issues are not prevented or remedied it can negatively impact the ability to receive grants and donations, as well the assessment and ratings in the different charity rating systems.
What Does the Financial Audit Involve?
An audit for a nonprofit organization involves an assessment of the organization’s internal controls by examining the organization’s financial records to make sure they are complying with the requirements of a tax-exempt entity and identify opportunities that will help improve the overall financial health. If the auditor finds that the conditions are not met, and there are material weaknesses and significant deficiencies, the organization could lose nonprofit status. The audit also involves the issuance of a Management Letter. The purpose of the management letter is to communicate deficiencies in internal controls and make recommendations for improvements.
Possible Material Weaknesses and Significant Deficiencies:
- Lack of Segregation of Duties – This occurs when one individual has control over all aspects of a transaction, from inception to completion. This control increases the risk of errors or fraud occurring and makes it more difficult to detect if something does go wrong. To mitigate this risk, it is important for not-for-profits to have adequate segregation of duties within the organization. This will reduce the opportunity for fraud and help find errors which could negatively impacts a nonprofits rating assessment.
- Weaknesses in Internal Controls – Internal controls are the policies and procedures put in place by an organization to ensure the accuracy and completeness of its financial statements. If these controls are weak, it increases the risk of errors or fraud. This can affect a nonprofit’s reputation and ultimately decrease donor confidence.
- Inadequate Documentation – Not-for-profits should maintain adequate documentation for all transactions. This documentation can be used to support the accuracy of the financial statements and ensures your organization is reliable and honest. This is essential for State and Federal funding, grants, and donations.
- Lack of Compliance with Laws and Regulations – Not-for-profits must comply with a variety of laws and regulations, including those related to taxes, fundraising, and reporting requirements. Noncompliance can result in fees, penalties, the loss of tax-exempt status and ability to accept tax-deductible contributions, along with other negative consequences for the organization.
Take these steps to detect and prevent Financial Audit Issues
- Create strong internal controls (Separation of Duties, Reconciliation, Authorization)
- Establish clear roles
- Provide full transparency
- Institute effective monitoring controls
- Perform risk assessments throughout the year
- Ensure strong communication and buy-in from all key stakeholders/donors
- Disclose the material weakness in quarterly and annual filings
- Update all key donors throughout the year
- Contract with a third party to assist with new implementations
- Utilize efficient automation technology software
An organization’s financial audit is important, therefore if there are any concerns it is best to seek guidance from an experienced accounting service who specialize in not for profits. If you would like to hear more about improving your internal controls, addressing material weaknesses and significant deficiencies, or improving your GuideStar Charity Navigator rating, contact Consultance Accounting Services.