Successfully crossing the finish line of a nonprofit audit requires ongoing discipline and intensive preparation from your finance team. In a recent Abila study of nonprofit finance professionals, more than half reported spending two-plus weeks preparing for an audit! To help you along the journey, your financial accounting system is a companion in which you must have complete confidence.
Audit requirements for nonprofits vary by state of registration, in addition to federal requirements if the organization receives significant federal grant funding. Even if you’re nonprofit doesn’t exceed the annual revenue threshold typical of most state audits requirements, having an audit performed provides important transparency for key stakeholders, the general public, and potential major funders, such as foundations.
When evaluating whether your current financial accounting system best equips your nonprofit, you should at minimum have a solution that:
1. Ensures FASB-compliant nonprofit financial statements can be readily produced
Even a solution that’s designed to handle nonprofits’ reporting requirements may require lots of configuration and workarounds to generate compliant financial statements. Nonprofit leaders looking further ahead on the horizon also know that new FASB accounting standards are changing for fiscal years beginning December 15, 2017. These changes are intended to help nonprofits tell their financial story better, but some current nonprofit accounting systems will be challenged to help you make the required changes in financial statements and additional disclosures.
2. Helps you enforce key internal controls
If you work at a smaller nonprofit, you may be using a solution that’s optimized for daily use by a single finance user. And, you may find this experience limits your ability to collaborate with development staff, your executives, board members, and some funders on areas like budget planning and sharing overall financial metrics/reports. Finding a technology solution that truly has “view only” roles can not only help your overall organization, but can serve as a key internal control. The best fund accounting solutions can define role-based access on your segment structure, which makes the solution easier to use for everyone since menu navigation and entry are simplified.
3. Maintains an auditable trail of transactions, records, and all associated changes
The seemingly monumental task of audit preparation can be made dramatically easier when your solution is generating a rich audit trail over time. Watch out, though, because some solutions make a general claim, but can’t deliver an audit trail for common types of records like customers, employees, earning codes, vendors, and their segments. Ensuring the solution you use or are considering will have your back when it comes to the audit trail can save your team year after year during the audit process, so clarify this up front.
4. Proactively detects and actively prevents risk from fraudulent activities
Ideally, your solution should have the ability to monitor and alert management to activities that may be associated with fraud. In other cases, you can stop bad business processes or errors immediately. To do this, your solution must be equipped with configurable alerts to quickly notify other staff when checks are issued over certain dollar amounts, checks or vouchers are printed but not recorded, pay rates are updated, and vendor names or payment statuses are changed. It’s also important for these to be conveniently delivered – not just within the application, but also via email.
My best advice is to select technology that grows with your nonprofit to prepare you for this year’s audit and beyond. For many nonprofits, their first audit and additional audits down the road relate to large increases in revenue, including whether they’re awarded federal grant funding. Audits will become more complex as your organization grows!
As you go through audits, it’s also very common for auditors to make recommendations surrounding areas like internal controls in their report. As a result, many nonprofit organizations realize implementing auditor recommendations will require new business processes that must be supported by new technology solutions. One key recommendation you can solicit from your auditor is what solutions they’ve seen work well for other nonprofit organizations. After all, if you have an “audit friendly” finance and accounting solution, your auditors will understand they’re dealing with a proactive and prepared finance team when they arrive.
For a deep dive into the who, what, and how of nonprofit audits, check out the Nonprofit Audit 101 guide.