How to Avoid Audit Nightmares and Ensure Better Nonprofit Financial Management

Nonprofit Financial Managementnight·mare, noun

  • a frightening or unpleasant dream.
  • a terrifying or very unpleasant experience or prospect.
  • a person, thing, or situation that is very difficult to deal with.

Nightmare = No Fun, and yet all too often, a lack of proper organization and nonprofit financial management can result in restless nights because of them. You may liken the experience to that one time in college when you hadn’t studied for your final or finished a term paper in time. When these nightmares creep into our current realities they can be destructive and debilitating.

Below are five audit nightmare scenarios and what you and your organization can do to ensure better nonprofit financial management, tracking, and reporting across the entire organization and guarantee you are always audit-ready.

Scenario #1: Disjointed reporting and data Organizations are at risk when they try and cobble together information from a variety of sources and systems for the audit. Having data stored in too many different systems typically creates inconsistencies in reporting and makes it very difficult (if not impossible) for an auditor to replicate reports.

In the long run, disjointed reporting and data will cost the organization money, extend the audit time, increase risk for mistakes, and raise possible compliance issues for your organization.

Scenario #2: Inconsistent nonprofit financial management, reporting and data. An organization’s inability to accurately and consistently produce financial statements and reports that are the same EVERY time is problematic. If you and your team cannot consistently duplicate reports, neither can your auditors.

The risk for exposure is tremendous and can lead to a lack of apparent oversight for the handling of finances, increased potential for mistakes that can cost time and money, a misrepresentation or inaccurate picture of the organization’s financial health, and greater exposure to fraud potential.

Scenario #3: Inconsistent allocation methodologies and corrected journal entries Corrections happen and allocations are necessary. However, organizations are often under pressure to show the greatest value for every dollar spent. Too many reclassifications, creative accounting approaches, and constant modification of allocation methodologies oftentimes create more problems than they solve.

Inconsistent overhead methodologies and multiple corrected journal entries indicate someone is either trying to hide an expense or lacks competency in their job. Allocation adjustments provide a distorted view of spending habits for the organization and can cause tremendous headaches during the audit process.

Scenario #4: Internal control deficiencies. Organizations never want to hear there are deficiencies in internal control over financial reporting. Gaps can exist in the design of internal controls, as well as the operation (or execution) of internal controls. In the first instance, internal controls are simply not set up properly in the first place, so regardless of proper execution, the desired result is not achieved. In the second instance, the controls are designed properly but executed poorly. Internal control deficiencies can range from moderate to material weaknesses.

Lack of proper internal controls can lead to regular or unqualified employees being given access to sensitive financial data. These deficiencies greatly increase the risk of fraud and the likelihood of a failed audit, costing the organization time, money and possibly credibility.

Scenario #5: Improper internal processes. Similar to internal control deficiencies, improper internal processes can leave an organization exposed and the mission compromised. In many instances, organizations may have proper workflow processes in place, but simply are not executing them properly or do not have proper documentation in place to support those processes.

Improper internal processes can lead to inconsistent approval processes for expenses (for example, a junior-level employee approving travel and entertainment expenses for a colleague). Without proper processes, this can put an organization in a compromised position and expose both security and fraud issues.

Impacts on your organization. Nightmares are no fun and can have a variety of unintended consequences for your organization, including:

  • Extra time, money and resources spent during the audit process
  • An impact to your organization’s credibility
  • Exposure to an increase in fraudulent activity across the organization
  • Ongoing compliance issues
  • Pain and burden that comes with a troubling or failed audit

Steps to avoid an audit nightmare and sleep better at night. Do not fret. Here are steps to help make your audit nightmares a thing of the past. Implement one of these sleep aids and call us in the morning:

  • Take an honest assessment of your current accounting software:
    • Does my software offer true fund accounting capabilities?
    • Is my software designed and built specifically for nonprofits?
    • Can my auditor quickly and easily get what she needs from our system?
    • Can I produce reports consistently and accurately each and every time with little to no fuss?
  • Ensure you can produce financial reports that are accurate, timely, in context, and readily available on a monthly or quarterly basis. They should include a configurable charts of account, year-end donor summaries, and other standard reports.
  • Evaluate your ability to create reports that match the purpose. Most boards look at financial reports for four reasons:
    • To comply with financial standards
    • To evaluate effectiveness
    • For forward planning
    • Or to take action
  • Ensure you have proper internal controls in place (and software that supports those internal controls).
  • Review and assess your internal documentation and workflow processes to make sure everyone is compliant and on board

Here at RBP Methods our goal is to help you achieve success and ease of mind when it comes to accounting and nonprofit financial management. RBP Methods always believed in providing the best possible solution for each organization individually. Over the years we have grown, but our commitment to excellent service remains strong. Contact us to see how we can help you remain prepared, with the proper tools, to improve efficiency and remain prepared for an audit at any time.