Most people involved in nonprofits will encounter an audit process at some point (although depending on the state you're in or your nonprofit's size and funding sources, you might be lucky enough to avoid this hassle). If you don't have good systems and processes in place before the audit begins, the audit can be a time-consuming, stressful endeavor. But it doesn't have to be that way.
Explaining the Audit Process
The audit process might seem like a mystery, so let's break it down into the what, the why, and the how.
What: The auditor will review your organization's financial statements during the audit to determine whether they meet generally accepted accounting principles (GAAP).
Why: The Financial Accounting Standards Board (FASB) requires auditors to issue a report to the nonprofit's board of directors about whether the financial statements represent the organization's financial condition, position and operations fairly.
How: An auditor's approach to fieldwork will be based on three considerations:
Assessment of risk - in most organizations, the most significant exposure to the risk of misappropriation or misuse occurs in cash flow into and out of the organization (Accounts Payable and Accounts Receivable).
Review of internal controls - mitigating that risk through solid controls over access to funds and records, and building in checks and balances through separation of responsibilities in entry, approval, and authorization go a long way to reduce the assessed level of risk and the resultant level of testing to be performed.
Specific concerns of the board or management - sometimes management or the governing body of the organization asks for certain types of transactions or groups of activities to be afforded a higher level of scrutiny than standard testing would provide.
Auditors develop an audit approach based on these factors, a review of your general ledger, and your responses to some standard questions. Once the approach has been determined, they will compile a request for documentation from your staff. This is where the burden on your team can add up, but there are ways to lessen the pain.
Tactics to Simplify Your Life
The auditor will begin testing transactions on a scope basis, which means they aren't looking at everything. It entails the auditor providing you with a list of transactions for which they want to see all the supporting documentation and verify the processes described are working the way they should. This part of the fieldwork can be the most time-consuming for your staff, but if you implement these three tactics, you can alleviate much of the stress of the yearly audit.
Proactively Providing the PBC (Prepared By Client) Requests
When we help nonprofit clients prepare for an audit, we get the PBC (Prepared By Client) list of all the auditor's requests to complete fieldwork. You can deliver this to the auditor before their fieldwork begins, making the process more efficient. While the items on the list will vary, they will likely include anything with a material impact on the organization's finances.
Suppose you have an accounting partner who will review the requests and provide the documentation proactively to the auditors in a defined, streamlined practice. If so, it can help your organization in two key ways:
First, it reduces the amount of time your staff spends on the audit.
Second, it may help you negotiate better rates with the audit firm because it reduces the time and effort required of their team.
Streamlining with Accounts Payable and Accounts Receivable Automation
Having reliable accounts payable and accounts receivable automation helps you consistently manage the checks and balances required for an audit review. An automated system also means all of your supporting documents will be easily accessible from the system, facilitating the testing of transactions.
Paper-based AP and AR processes are error-prone and sluggish. Plus, auditors will have to get physical files from you and leaf through them which is an inefficient process. Instead, AP and AR automation helps nonprofits run smoothly by separating data entry from review from disbursement or receipt, and by streamlining the review and approval process, avoiding duplicates and keeping everything in one place -- all key to a stress-free audit.
Choosing the Right Accounting Software
One last thing nonprofits can do to be sure they're setting themselves up for success at audit time is to choose the right software with the right capabilities. At Lescault & Walderman, we frequently recommend Bill.com for AP and AR management because it integrates with QuickBooks and Sage Intacct, two of the most used accounting software products in the nonprofit world.
Many nonprofit boards don't realize that the software they use is as integral to good internal controls and accurate reporting as the policies and procedures they maintain. For example, nonprofits have particular accounting needs. They handle grants and donations, record volunteer time, create budgets, and of course, have specific tax filings and financial statements required by law. Meaning they need features that for-profit businesses don't, especially since they can be under more scrutiny from the public and the government.
Using software designed for nonprofit accounting is an essential component of simplifying bookkeeping tasks so that the audit doesn't cause unnecessary headaches. And, of course, which accounting software a nonprofit chooses depends on its specific needs. It's essential to choose one that is user-friendly and has the functionality the nonprofit requires.
Your annual audit can be an easy, streamlined process instead of something you dread every year. With a little pre-planning with your accounting partner and some solid systems and procedures in place, you can keep your focus on running your organization and serving its mission and leave the rest to the number-crunchers.
Lescault & Walderman is an accounting partner of Bill.com. Reach out to see how they can help with your accounting needs and nonprofit audit preparation.