Audits are a common aspect of nonprofit organizations, but they often feel like a never-ending cycle that drains both time and resources. In the nonprofit sector, where staff often wear multiple hats, the additional workload can be particularly challenging. However, there are steps you can take to make the audit process less painful and more efficient.
In the video below, Laura Bertagnolli, CPA, of Finance at Signature Analytics, dives into some strategies nonprofits can utilize to make audits more efficient.
Embrace Digital Documentation
“It’s all about having the information readily at your fingertips.”
One of the most significant advancements in audit preparation is the shift from paper documentation to digital records. Many modern ERP systems now allow you to attach supporting documents, such as vendor bills, directly to your financial transactions.
This digital trail not only saves time but also allows auditors to access the necessary documents remotely. No more digging through file cabinets or scanning endless pages of paperwork. Going digital simplifies the audit process significantly.
Leverage Monthly Financial Statements
Producing monthly financial statements is an excellent practice for nonprofits. When auditors request your latest financial statements, you won’t find yourself scrambling. Instead, you can access them easily and share them with your audit team. This not only demonstrates your commitment to financial transparency but also makes you feel more prepared and in control.
Strengthen Fiscal Year Controls
In some nonprofits, there’s a problem with having the right rules and checks in place throughout the year. This can be a problem when it’s time for an audit. People might worry that there were mistakes made in the past, especially if the financial records aren’t being closed correctly and on time.
Also, it’s important to have clear rules about who does what in the organization. When these rules break down, it can create a risk of fraud, which could become a problem during an audit. So, you should always make sure that different people have control over different parts of the financial process.
For example, you wouldn’t want one person to be able to do everything from creating a new vendor, making a bill, paying it, and then balancing the bank account. If this were allowed, they could potentially set themselves up as a vendor, pay themselves, and no one would know because they’re also balancing the bank account. This is a big problem, and it’s an example of duties not being properly separated.
Even if your nonprofit is small, there are ways to make sure these duties are separated and that everything is in order. You can find resources online, such as information about “two-person segregation of duties,” to help you understand how to do it, no matter the size of your nonprofit.
Segregation of Duties and Internal Controls
Maintaining a clear separation of duties within your finance team is essential. No single individual should have too much authority over financial transactions. Proper segregation of duties reduces the risk of fraud, a significant concern for nonprofits. For example, you should never allow one person to create a new vendor, generate a bill, make a payment, and reconcile the bank account, as this setup creates opportunities for potential misuse. Even in small nonprofits, there are ways to implement two-person segregation of duties effectively.
Challenges Faced by Nonprofits in Audit Processes and Solutions
While audits are a necessary part of nonprofit operations, they often present several challenges. Understanding these challenges and having solutions at your disposal can help streamline the audit process and make it more efficient:
1. Limited Resources:
Challenge: Nonprofits frequently face resource constraints, both in terms of finances and personnel. This can make it challenging to allocate the necessary time and resources to prepare for audits adequately.
Solution: Start the audit preparation process well in advance. Allocate dedicated time and resources for audit-related tasks throughout the year to prevent last-minute rushes. Consider seeking pro bono audit services or financial support from grantmakers to alleviate financial constraints.
2. Complex Funding Sources:
Challenge: Many nonprofits receive funding from various sources, including government grants, private donations, and foundations. Keeping track of these diverse revenue streams and complying with their respective reporting requirements can be overwhelming.
Solution: Maintain meticulous records of funding sources and their specific reporting guidelines. Use accounting software that can help you categorize and track different revenue streams efficiently. Regularly review grant agreements and contracts to ensure compliance. Seek advice from experts who understand the unique challenges posed by diverse funding sources.
3. Rapid Growth and Expansion:
Challenge: Nonprofits experiencing rapid growth or expanding their programs may find it challenging to adapt their financial processes and controls accordingly. This growth can outpace the organization’s internal capacity to handle audits effectively.
Solution: Regularly assess your financial and internal control processes to ensure they scale with your organization’s growth. As your nonprofit expands, invest in financial software that can handle increased complexity. Consider engaging external financial experts to provide guidance and support during periods of rapid growth.
4. Compliance and Reporting Complexity:
Challenge: Navigating the intricate web of compliance requirements, especially when dealing with government grants, can be overwhelming. Ensuring that financial reports align with each grantor’s unique standards can be time-consuming and error-prone.
Solution: Stay informed about the specific reporting requirements of each funding source or grantor. Use accounting software that can generate tailored financial reports to meet individual compliance needs. Consider hiring a compliance expert or consultant to assist with reporting complexities.
5. Data Security and Privacy Concerns:
Challenge: Nonprofits often handle sensitive donor information and personal data, making data security and privacy a significant concern during audits. Ensuring that confidential information is protected is vital.
Solution: Implement robust data security protocols and encryption to safeguard sensitive data. Train your staff on data security best practices and maintain compliance with data protection regulations. Engage with IT security experts to conduct regular audits of your data security measures.
By understanding and addressing these common challenges, nonprofits can enhance their audit processes, making them more efficient and less burdensome. These solutions provide a starting point for nonprofit leaders looking to ensure their financial transparency and compliance while minimizing audit-related stress.
How Signature Analytics Can Help Your Nonprofit
Signature Analytics’ nonprofit accounting services help you make financial decisions based on the highest quality accounting practices, while our day-to-day outsourced accounting teams implement the highest quality donor and government accounting standards.
For additional assistance with cash flow management, developing detailed nonprofit budgets, and audit support, contact Signature Analytics today.