Nonprofit organizations are essential in our society. They help and support people in countless ways. Because nonprofits receive the majority of their funding through individual donors and are exempt from paying taxes, nonprofits are held accountable to their donors and the government in terms of their spending. This is done through financial audits. In order to be prepared for an audit and to make the process more manageable, it is important that financial information is streamlined. How is this done?
Financial reports are essential to audits. Make sure that you have copies of every internal report and financial statement shared with the supervisors and managers during the period after the previous audit. These reports, which were produced to keep those higher-up in the organization current on the financial climate of the organization, will be the focus of an auditor’s attention. The auditor will also investigate the organization’s management information system to ensure that it is sharing financial information and communicating according to standards. Nonprofits are also required to submit periodic reports to the government, including the IRS. The audit will review these reporting procedures to ensure accuracy and make sure the reports are submitted in a timely manner.
A nonprofit organization’s accounting practices are also under scrutiny during an audit. The accounting system will be carefully analyzed to look for unethical accounting practices or mistakes. The Internal Revenue Service (IRS) or an independent financial auditor will analyze the policies and safeguards put in place to protect the organization’s cash and financial records from theft or mismanagement. Auditors will also compare metrics, such as the number of reporting errors, from the current year to past years. By ensuring that your accounts are running according to code, you will save yourself a lot of time and stress when an audit comes around.
Management of Contributions
Nonprofits are not only expected to, but they are required to, use their funds from contributors in a responsible manner. Managers within the organization must pay careful attention to the way they distribute contributed funds. A comprehensive nonprofit audit analyzes the way contributions are used. Auditors compute the relative percentages of each type of income distribution and compare it to the results of other organizations serving similar areas of need. The salary levels of top managers will be reviewed. Additional expenses, such as bonus pay, vacations, and other incentives, will also be reviewed to ensure organizations are spending their contributed funds wisely and appropriately. Auditors will also analyze any investments held by the organization and determine, through review of the historical and expected future returns, whether or not the organization is investing its funds wisely.