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3 ways to ensure a smooth-as-butter audit

by with No Comment AuditFeatured BlogNonprofitProductivity

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Are you soaking in the summer sun as much as I am? Here at 100 Degrees, I’m splitting my time between supporting clients and taking as many Zoom meetings as possible outdoors. The weather here in Buffalo is only nice for so long, so I’ve got to take advantage of that sunshine!

Lots of our clients have audits going on right now, and all of this audit work can be a major source of stress for nonprofit leaders. There are a lot of questions, a lot of panicked moments looking for that one missing contract, and tons of uncertainty as to whether or not you’ll “pass”.

But I’ve learned a few things after supporting dozens of audits over the years and want to share how to drastically improve efficiencies and reduce time spent on your audit.

If you don’t yet have an audit, STICK WITH ME! These are best practices you can use to free up time and brain space to focus on your mission and ensure you’re ready for any future audit.

Ready? Here are my secrets to a smooth-as-butter audit!

1. An organized, cloud-based document storage system halves prep time. Many audit firms use online file sharing systems, where they have clearly labeled folders for each item requested, so you can just drag and drop files into each one. This has virtually eliminated all back-and-forth email and helped us to speed up the time to prepare and submit documents. And to make your own preparation as quick as possible, start from day one with an online folder system in Google Drive or Dropbox – create a folder for each month and store all timesheets, receipts, bank statements, reconciliations, etc within that folder for easy reference later!

2. Quarterly reviews throughout the year dramatically decrease prep time. If you’ve ever undergone an audit, you probably know the hot topics and past issues for your organization. Common issues I’ve seen are around cash management and grant restrictions, so I suggest you do a mini internal audit of those hot issues each quarter. One client recently did this, completely solved their issues, and wiped the comment from the management letter!

3. The audit is a team effort, not just a task for the finance team. The audit timeline and goals should be shared across the organization because development, leadership, the board, and programs may all get pulled in at some point. Communicate early and often to get the whole team on board.

What questions do you have for me about the audit? Just click Reply and I’d be happy to answer!

PS – Want more info on how to prepare for a stress-free audit? Check out this article >>> https://100degreesconsulting.com/stressfreeaudit/

 

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How to avoid the most common audit management letter comments

by with No Comment AuditFeatured BlogNonprofitProductivity

Grab this amazing guide to help avoid the most common management letter comments!

Remember back to elementary school when it was report card day, and you’d go rushing home, excited to show your parents your straight As? Maybe that was just me?

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I spent my school days as a complete over-achieving nerd, so I never really had the experience of bringing home a bad report card, but I imagine it didn’t feel great.

I have, on the other hand, been through many audits with different nonprofit organizations, and getting a laundry list of management letter comments feels like a bad report card.

You wish you would’ve worked harder or done things differently throughout the year, and it’s amazing how a few typed words on a letter (that goes to your board – yikes!) can motivate you to make whatever changes necessary.

So that you don’t get that icky bad report card feeling, I am going to share three common comments I’ve seen on many nonprofit organizations’ management letters. Make sure you’ve got these items cleaned up and in order:

1. Cash. The old adage “cash is king” rings true. Cash will be one of the first things the auditors look at and something they focus on, for good reason, because cash = risk.

How to nail it: Make sure all bank and petty cash balances tie to the reconciliations and the statements. Clean up any unreconciling items and make the appropriate journal entries to adjust, if necessary. Ensure there is a proper review and approval process for all bank reconciliations, and document it. Organize all backup documentation and bank statements.

2. Temporarily restricted net assets. I shared the basics of TRNA here and be advised that this will be the second thing the auditor looks at because it is all about donor intent and how we’re spending our money. We should be accounting for any type of restrictions on our funding so we know at any given time how much of our assets are temporarily restricted or unrestricted.

How to nail it: You must begin tracking restrictions long before the auditors arrive. Make sure you have the systems in place to categorize revenue and expenses by donor or award. Reconcile all TRNA, make sure it ties to the trial balance, and prepare all backup documentation for the auditor’s review – they will want to see the donor’s letter that shows exactly how they want their money spent.

3. Finance manual & policies. Every organization should have a finance manual that documents approval policies, procurement process, bank signatories, and much more. Oftentimes, an organization creates the manual then completely forgets about it. Same with conflict of interest policy – we create it, have everyone sign it once, and file it away, never to be seen again. The auditors want constant vigilance on policies and procedures.

How to nail it: Set a time to review your manuals and policies annually. Update as needed, get new staff to sign the appropriate policies, and add any new changes to your business. Did you expand to a new location or add another restricted bank account? Update that manual!

So there’s your head start to the audit. Make sure you tackle these items starting NOW to ensure they don’t end up as comments on your management letter.

Want more about audits?

Grab this amazing guide to everything you need to know about nonprofit audits.

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How to Track Temp Restricted Net Assets

by with No Comment AuditFeatured BlogFinancial ManagementFinancial StatementsNonprofit

Temp restricted…what…what?

Today’s as good a day as any to tackle unrestricted vs. temporarily restricted income, both the bane and the lifeblood of so many nonprofits’ existence. Donor restrictions are often the first thing the auditors look at, and often the hardest thing to track accurately and appropriately. What it boils down to is:
  • How you’re tracking and spending your donor-restricted funds
  • How you’re using your cash and whether you have enough to cover all restricted future activity
  • Whether you’re dipping into one restricted pot to cover another while you wait for cash to come in. Or maybe you’re dipping into unrestricted cash to pay for your programs, meaning you’re not charging enough for services.
These are all very important things to consider – donor intent is the lifeblood of your organization! – and if you don’t have a solid system to properly track restricted activity, you may not know the answers to any of the above.

Let’s start with the basics.

Unrestricted income has no donor requirements. We can use it when we want, how we want, for operating expenses or program expenses. We are not necessarily obligated to report on those specific funds. You may also see it called: Without donor restrictions. Temporarily restricted income, on the other hand, is subject to donor imposed stipulations that will be met by the actions of the organization (i.e. programmatic accomplishments) and/or the passage of time. And contrary to what many nonprofit accountants probably wish, temporarily restricted income must be tracked separately from unrestricted income in the books and a schedule must be created offline. You may also see it called: With donor restrictions. When donor-imposed restrictions are met (like the time period has passed or we’ve spent all the money on the designated programs), temporarily restricted net assets are released and reclassified to unrestricted net assets.

How about a few examples?

The Jones Family Foundation gives $10,000 to your organization. Their pledge letter, dated June 1, 2023, states that their gift is for “operational support”. Unrestricted or temporarily restricted? Susan Jones gives $5,000 and the post-it attached to her check says “for 2024 adult education program”. Unrestricted or temporarily restricted? The World Educate Foundation pledges $100,000 over four years – $25,000 in 2023, 2024, 2025, and 2026 – but did not specify a project to fund. Unrestricted or temporarily restricted? Did you get all the answers right? Keep reading…

So now that we know what unrestricted and temp restricted funds are, how should we be tracking them? The answer is twofold.

First, the funds need to be marked in your accounting system as unrestricted or temp restricted. That can be accomplished by creating an account code for temp restricted income, or perhaps a class that identifies the type of revenue, then every single income entry must be tagged to the appropriate restriction. (Want to know how to set up your accounting system to track temp restricted net assets? Go to our post here >>>) The second method for tracking is offline in Excel. Your auditor will want to see a temp restricted net assets (TRNA) schedule that shows opening balance of temporarily restricted net assets by program, additions throughout the year, releases (aka how much you spent) throughout the year, and ending balance. This number will flow directly onto your balance sheet of your audited financials so it’s important the numbers tie!
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To recap, here are the three steps you need to take to ensure you’re handling temporarily restricted income properly:

  1. Are you identifying income restrictions as they come in? Are you tracking in both the donor database and accounting system?
  2. Are you tagging/coding income restrictions into your books?
  3. Are you preparing a schedule outside of the accounting books on a regular basis (annually at the bare minimum) that shows opening balance, additions, releases, and ending balance, that then flows into our balance sheet?
If you can’t shout YES from the rooftops to any of these questions, then we should talk! We can help you get set up and on the right track so that you, your donors, and your auditors are confident that you’re both tracking and using your funds as intended. Hip hip hooray, TRNA!

Do you want to manage your restricted funding with clarity and ease but don’t know where to start? Are you ready to truly understand your restricted funding picture so you can fundraise more strategically?

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I created Master Your Restricted Funding to help you do just that! For $27, you get a Masterclass, a template to track all of your restricted grants and expenses, and I walk you through step-by-step on how to use it. This will help you revolutionize how you’re managing, analyzing, and spending your restricted funds!

Grab it for just $27 here!

More Resources:

Here’s a detailed step-by-step process to tracking temporarily restricted net assets in Quickbooks Online >>> Still feeling stuck? Set up a time to chat with us and see how we might be able to help >>>
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Six Steps to Ensure a Stress-Free Audit

by with No Comment AuditFeatured BlogFinancial ManagementNonprofit

Grab this amazing FREE E-BOOK to ensure a stress-free, quick, and painless audit!

I had a few alternative titles for this post.

Audit Prep: You’re Already Behind the Eight Ball

Audit Prep: Shape Up So They Can Ship Out

Audit Prep: No Management Letter Comments, No Cry (sung to the tune of Marley’s No Woman, No Cry)

Joking aside, the audit can be one of the most stressful weeks (or months!) of a nonprofit ED’s year. Not only are you expected to make sure every single journal entry is properly booked, but you’ve got HR files and donor letters and receipts from a year’s worth of expenses to be sure are coded, organized, and easily accessible. Not to mention the things that can be just plain confusing: temp restricted net assets, anyone?

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The auditor’s arrival to your office does not have to be the worst moment of your year (and in fact, it shouldn’t – they truly are here to help us!) and I’ll give you six action items to ensure it’s as smooth as can be.

1. Fix any prior year issues. As soon as the auditors sent you that final report and management letter last year, you should’ve started tackling their comments right away to make institutional changes to fix any issues. If you didn’t jump on that, jump now! You need to demonstrate you’ve taken their recommendations seriously and have made substantial effort to correct any issues. This is important to all stakeholders to ensure we’re maximizing and being good stewards of our resources to further our mission.

2. Practice ongoing communication with your auditor. This should not be the first time you have spoken with your auditor since they walked out last year. Most good firms will be in communication throughout the year on new regulations, best practices and be available to answer your questions as they come up. Audit week is NOT the time to ask how to track your temp restricted net assets – be prepared for an auditor brain explosion if you ask her.

3. Familiarize yourself with the PBC list. If you haven’t already, ask your auditor now (seriously, GO EMAIL HER NOW!) for the PBC, or Provided By Client, list. This is a comprehensive list of everything the auditor needs both prior to on-site and when they arrive. Here’s a great sample list.

4. Create an internal team game plan. As soon as I have the PBC list in my hands, I schedule a team meeting and assign a person responsible and a deadline to each item. We also have a year end close deadline list (e.g. soft close on January 15th, review reports and fix any issues by January 22nd, hard close by January 31st) which helps determine when PBC list items can be completed. The final part of the game plan is our brief weekly check-ins on the status of each item until the auditors arrive.

5. Start early. If you’ve got enough capacity in your finance team to do so, I recommend tackling as many items as you can simultaneously with closing the books for the year. You’ll likely be asked for personnel and finance policies, employee lists, check registers and other items that can be sent immediately.

6. Double-check every submission. I think we can all relate to this: we work really hard to complete the temp restricted net asset schedule quickly this year, send it off to the auditor before we officially close the books and realize that there was an edit which throws off the whole balance. While you can send many items early, you should wait until your books are absolutely final to send all your schedules. Remember, everything must agree – general ledger vs. schedule vs. balance sheet and income statement – and a surefire way to ensure this is to wait until your books are solidly closed. You don’t want to show the auditors fifteen different reconciliations later to show how you made the changes.

The six action items above will help ensure a smooth audit process even before the auditors arrive. Remember, preparation is crucial to a smooth audit – stay organized and you’ve got this!

Don’t forget to grab this amazing FREE E-BOOK to ensure a stress-free, quick, and painless audit!

How do you feel about the annual audit? Do you view it as a learning opportunity or pure agony?

Need help getting your ducks in a row for this year’s audit? Give me a buzz!

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Finding an auditor: the RFP process

by with No Comment AuditFeatured BlogNonprofit

We’ve got more audit talk for you today! The 12/31 year-enders are prepping and the 6/30 year-enders are looking for auditors, so we’re trying to cover all our bases here.

I spoke with not one but two organizations last week that need a new auditor and asked me for suggestions (good first step, by the way!). I’ve worked with a great audit firm for many years and immediately thought of them but unfortunately, they’re in another state. I texted the audit partner (yes, I basically have him on speed dial!) and he said he’d love to participate in an RFP process. That got me thinking about how important those referrals are for great firms – you’ll likely have a much better experience than simply Googling “nonprofit auditor [your location]”.

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Not only do we need an audit firm that specializes in nonprofits, but we also want someone we connect well with. You will likely be communicating with that auditor not only during the annual audit process but also throughout the year as questions come up. The auditor will also meet with your board’s audit/finance committee or perhaps even present at a board meeting.I recommend an RFP (Request for Proposals) process to appropriately do your due diligence and get an auditor that will work best for your organization. I promise it’s not complicated!

  1. Form a committee of stakeholders. Perhaps the ED, your lead finance person and a board member would be a good place to start.
  2. Determine what you’re looking for in an audit firm and write it down. This will be the basis of your RFP document. Here are some things to think about: What size firm do you want? What is their expertise? How many staff will work on your engagement? What is their average turnaround time? Here is a sample.
  3. Identify who you want to send the RFP to. This is where your network comes in! I suggest reaching out to colleagues, peers and board members and finding out which audit firms they recommend. Come up with a list of maybe 10 firms and their contact information.
  4. Send the RFP out. Send both a paper and email copy to the contacts you identified with specific instructions on how to submit the proposal.
  5. Review the proposals, select your two or three finalists and invite them into the office for a meeting to discuss their proposal. Don’t forget to discuss fees!
  6. Make your final decision and hire your new audit firm. Let the fun begin!

With the proper due diligence, this new audit firm will serve as a solid sounding board for your organization. If you have a new project come up throughout the year and you aren’t sure how to make the accounting entry, you can call them for advice rather than waiting for them to find potential mistakes during the audit.

On the contrary, if the audit firm didn’t live up to your expectations, remember that the relationship isn’t forever – simply go through the RFP process again to find a better fit.

How did you find your audit firm? How long have you been with them? Need help managing the RFP process or don’t know where to begin?

I can help!

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Do we need an audit?

by with No Comment AuditFeatured BlogNonprofit

I hope everyone had a restful weekend! Are you December-31st-close people finishing up year-end? More importantly, is everyone sticking to their resolutions? I’m proud to say that I’ve gone to yoga once a week! It’s amazing how much better I stick to something when I simply put it in my calendar and treat it as I would a doctor’s appointment. Non-negotiable, not cancellable, not available for anything else during this time. Let’s keep it up!

We talked last week about how to prep for an audit and I’m here this morning to talk about those organizations who are in the initial phases of growth (less than $1M) and haven’t yet had an audit. They’re not sure if they need an audit and once they decide they do, they have no idea how to find the right auditor.

Let’s tackle this head on!

First, what is an audit? Is it when the big, scary IRS comes in and rifles through all your files and you’re in trouble? No way! This is when you choose an independent auditor to come in and assess not only your books but also your policies and internal controls, then they hand you a neatly comprised set of financials that you can then share with donors, funders and other stakeholders. Also, you pay them.

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Now that we’ve got that cleared up, does my organization really need an independent auditor? There are a few factors to consider here:

What state are you incorporated/registered in? Each state has different audit requirements. Are you registered in any other states? Oftentimes, organizations will register in a number of states in order to fundraise there and those states may require audited financials. Here is a great guide of state-by-state audit requirements and links to statutes. [Please always consult your legal counsel before making any decisions – sites like this could be outdated!]

Who are your funders? Many private foundations and government agencies will require audited financials along with grant or contract applications. If they don’t require an up-front audit, they may require one when you spend above a certain threshold of federal funds in a year (currently $750,000).

The IRS requires nonprofits to complete the 990 but does not require an independent audit. Part XII Financial Statements and Reporting of the 990 asks whether or not the organization has had an independent audit and, as you probably know, this form is public information.

In short, even if your organization manages to squeak by without technically needing an audit, it is certainly a best practice because:

  • You’ll gain the credibility and confidence of funders and promote financial transparency of the organization.
  • Your organization will potentially be eligible for new and different sources of funding as well as ratings by the important charity watchdog organizations (Charity Navigator, Guidestar, etc).
  • Finally, and maybe most importantly, it’s an opportunity to do a deep dive into your policies and procedures to ensure you’re using your limited resources most efficiently.

Here at 100 Degrees Consulting, we are all about BEST PRACTICES!

Come back tomorrow for the second installment of this thrilling series: Okay, let’s do it. Now how do I find an auditor?