Transcript Episode 119 – How to Ensure Your Nonprofit Audit is Smooth as Butter on The Prosperous Nonprofit
Stephanie Skryzowski: [00:00:00] Hey there. If you’re looking for the 100 degrees of entrepreneurship podcast, you’re in the right place after a hundred amazing episodes, we’re changing things up to serve you the most inspiring content in a fresh new way. Thanks for being here and keep listening.
Welcome to the prosperous nonprofit, the podcast for leaders who are building financially sustainable and impactful nonprofits and changing the world. I’m Stephanie Kowski, a Chief Financial Officer and founder and c e O of 100 Degrees Consulting. My personal mission is to empower leaders to better understand their numbers.
To grow their impact and their income. On this show, we talk to people who are leading the nonprofit sector in new, innovative, disruptive, and entrepreneurial ways, creating organizations that fuel their lives, their hearts, and their communities. Let’s dive in.[00:01:00]
So a couple things that you could do to make sure the audit is as smooth as possible. The first thing to think about is. What did last year’s auditors tell you that you need to fix or adjustments that you need to post. Now, if this is your first year audit, you can ignore this one. But if you’ve had an audit before, think about, okay, did we actually post all of the adjusting journal entries that they asked us to, or have we adequately implemented?
Everything that they asked us to on the management letter, right? So maybe they said, all right, you need to have a gift acceptance policy. We recommend you implement a gift acceptance policy. Okay, well have you, has it run, you know, gotten approval by your board or what, whatever you need to do. So think about what did they tell us to do last year?
Can we make sure that we’ve actually done that? So that’s number one. The second thing that you wanna do to make sure the audit is as smooth as possible is to think [00:02:00] about scheduling. So often as a first year audit with a larger firm, they may come to you and say, okay, here are the different weeks that we can do it.
Which is fine, but if you have like full reign over when you wanna do the audit. Really think strategically about when to put that on the calendar, right? So if you have a June 30th year end, like you probably don’t want to schedule the auditors to arrive on July 15th, two weeks later, right? You wanna give yourself some time after your end close to make sure the books are in order, that all your paperwork is organized.
Also, think about. People’s travel, like who are the key personnel that are gonna be involved in the audit? Let’s not schedule the audit. When you know, they go out of town every single year, don’t schedule it around, say your gala. You know, really think about what are the other big events that you have going on, and don’t schedule it around those times, if possible.
Of course, sometimes not avoidable, but if possible, Now once you have an auditor, [00:03:00] another thing that you can do to really make sure that the audit is going to be as smooth as possible is get the P B C list that’s prepared by client, so likely they will have sent this to you in advance. And it is a list of all of the different things that they are going to ask for in preparation for the audit.
It is a very comprehensive and very long list of like dozens and dozens, maybe a hundred items, but this is every single thing that they are going to need prior to the start of the audit. So whether the audit is going to be remote, which most of the audits that I handle right now are remote, or whether they are coming physically to your office, you wanna have everything pulled in advance because they are gonna ask for things like all of your board meeting minutes from last year.
They are going to ask for things like all of your bank statements and bank reconciliations for, you know, December 31st. [00:04:00] They are going to ask for a reconciliation of your accounts receivable. Like there’s a lot of different things that they’re gonna ask for, and you certainly do not want to be pulling them when they have already started.
That is only gonna slow things down, trust me. So ask for the PPP C list. If you don’t have one already, maybe they don’t call it a PPP C list. Maybe they just call it the audit prep list, or maybe they have an online portal where you upload documents. Whatever it is, make sure you have access to this list and start gathering documents.
Now, I like to typically have everything pulled that they have requested. Literally every single box is checked by about a week before the audit begins. That way they can do a little bit of. Pre prep work themselves. And once they arrive, they’re already asking you for samples, right? So they’re gonna take the general ledger that you provide, and then they’re gonna pull a number of samples from it and say, okay, give us the receipts and the invoices and the documentation [00:05:00] for all of these 30 items that we’ve selected.
And so that’s what you could be focusing on while they are going through all the other stuff. So you really wanna have everything pulled as far in advance as possible. And finally to really ensure that the audit is as smooth as possible, we want to. Stay organized, right? So rather than sending, you know, a hundred emails back and forth, maybe you set up a file structure within Google Drive where you have everything organized neatly.
A lot of auditors now have like an online portal. It’s sort of automatically organized for you, which is so nice. But if they don’t have that, just make sure you stay organized that way. You know, you know what you’ve already sent. You don’t duplicate things and you’re not clogging up everybody’s inbox with 50 emails a day.
So, The other advantage as well is that now you have this, like if you do this in Google Drive or Dropbox, you have this sort of cloud-based record of your audit to reference [00:06:00] next year. And that’s one thing that I love about this one audit firm that we work with. I really like their online portal because all of your responses from the prior year pop up in the the next year so that you can see, oh, how did I answer that question?
Last year and I can just update it for things that have changed or what type of schedule did I provide for that this last year. Okay, now I know what I can do this year. So anyway, that’s helpful. Um, and you can kind of create that for yourself. If your auditor does not have an online portal, I. So the next thing I want to think about is like what happens during the week of the audit.
Usually it’s about a week is what they schedule. And again, they are going to start by looking through everything that you have already provided. And so when 9:00 AM on Monday morning of the auto week rolls around, you don’t want them to be staring at empty folders and then you start sending them things because that is a huge waste of their time and that’s just gonna delay everything going forward.
So, I wanna make sure they [00:07:00] have everything in advance as much as possible. And the week of, they are likely gonna be asking you a lot of questions, mostly clarifying questions. What is this? Can you share more about that process? They’re going to be sending you lists of samples. Hey, can you send along, you know, the receipts and the invoices for these 10 credit card transactions, for example.
And that’s mostly the first week. And I always recommend like, Try and clear your schedule as much as possible so when they ask you a question, you can instantly respond and move on, right? What we don’t want is the end of their audit period to have this huge list of outstanding items because things are just gonna drag on and on and on.
Trust me, I’ve been there, I’ve been through very ill prepared audits, and I’ve been through incredibly smooth audits and. Frankly, the ill prepared ones were way more work. Even though it, it was just like the work went in on the back end instead of the front end. And that’s no fun because then you get pushed [00:08:00] up against different deadlines and anyway, we wanna stay on top of things.
So after they have done their quote unquote field work, and I use quotes because they’re not really in the field, at least I have not gone to an onsite audit in years upon years. Now everything is remote. Um, so after the field work is done, It’ll probably be a period of time where they’re finalizing things on their end.
Maybe some more questions and then you’ll get a draft of your audited financial statements. And as the finance person, I always like to look at their draft. I comb through it really, really closely, and I compare it to my accounting system to see, okay, what’s different? What have they put into different buckets or different categories than we have in our.
Accounting system that often happens or they sort of lump different account codes together, say on the balance sheet just for sake of presentation and sort of, uh, [00:09:00] brevity and clarity. And so I always like to tie the two back and make sure that I understand if there’s any differences. Why are there differences between QuickBooks, for example, and the audited financials.
So I spent a bunch of time doing that, and then I also read through all of the notes. At the end, you’ll probably have at least five or 10 pages of different notes explaining some. You know, some backgrounds of the organization and your methodology for recording different transactions. And I always like to just go through it and make sure that, number one, that it’s right, that there’s no typos, um, because I’ve found that it’s a template, right?
And a couple times I’ve found that, you know, an audit firm shared a draft and it has somebody else’s information in the notes, or it had our information from last year, so it is always worth proofing that. Now you may also need to share the draft with your finance committee or your treasurer or executive director, just depending on what your internal organizational processes are.
I think that’s a great best practice [00:10:00] depending on your, your board and your finance committee, but to share the draft of the financials with them, um, before. They’re finalized. I think that’s a really important step. And often your auditor will come present those draft financials to your finance committee, and we have one audit firm that does such a nice job with this.
They will come and present and they’ll share a number of financial metrics. And kind of let you know where your organization stacks up against their benchmarks. So that’s kind of cool. Um, and I know the finance committee absolutely loves each presentations because it’s like I can. You know, share the financial metrics all day long. But when they’re hearing it again from an external source, there’s additional impact there.
So I think that is super useful. It may be something you ask your audit firm if they can come present to your board or to your finance committee.
Hey there, if you want our handy PDF guide to have a stress free audit, go to [00:11:00] 100 degrees consulting.com/stress free audit. You’ll find all of the links that we talked about in today’s episode, as well as a whole bunch of tips and more everything we talked about. So go to a hundred degrees consulting.com/stress free audit.
So now that you have a draft of the financials, maybe there are some changes that you need to make. Likely they will also have presented you with a management letter. Now, the management letter. Oh man. The management letter. It has a long history In my nonprofit career. I used to hate the management letter because it used to feel like this list of our transgressions.
Basically a list of all of the mistakes that I made throughout the year. Now, what your management letter is intended to do is to really just give your organization a sense of, Hey, here are some issues that we found. This [00:12:00] doesn’t mean you’re a bad person. This doesn’t mean you’re a terrible C F O, This doesn’t mean your organization is going under.
But here are some things that we found that you need to do better. There are a few different categories of sort of findings on your audit, and the first is a material weakness. Now this is basically saying that there is a big issue with your financial. Statements and they had to correct something that is relatively major, right?
Material when it comes to financials means like something big, right? This is not just like a $2,000 error on a 20 million budget. This is something significant. So material weakness. Um, sort of under that, like the next tear down that’s not as bad as a material weakness is a significant deficiency. And then there are also like other, other matters or other concerns or other suggestions depending on how your auditor phrases it.
So. The auditors may find things in the course of the audit. [00:13:00] Perhaps like in my example, before, perhaps you got a really large grant and you didn’t book it correctly. Maybe you booked the entire grant, all of the revenue, when actually it was a conditional grant, and you should have booked the revenue as the expenses were incurred, right?
It happens, but maybe this makes up like 50% of your revenue. That may be a material weakness finding on your audited financial statements. Now again, This management letter is exactly that meant for management to let you know what the auditors found and what you need to do to improve. And the key is that we don’t make the same mistakes twice.
So if an auditor has pointed something out in your management letter, we want to not have that same comment again next year. So if you do get a comment like that on your management letter, it’s not the end of the world, but let’s make sure it’s addressed and fixed ASAP and that we don’t do it again. And one thing I do is I actually make a list.
Of any and all management letter [00:14:00] comments, whether they’re material weaknesses or significant deficiencies, or just other recommendations, I make a list of them and I check back in every single quarter following that audit to make sure that like, okay, did we address these? Check them all off? Yes, yes, yes, yes, yes.
Okay. We’ve addressed them. Good. And there’s really nothing worse than having the same management letter comments twice because. As management, you do have an opportunity to respond on the letter that is then, you know, sort of finalized. And so it is part of the final record management’s responses. So you can use that management response to talk about what actions you’ve already taken to rectify that situation.
And so you really wanna be able to say like, yeah, we’ve already, by the time of the issuing of this letter, we’ve already fixed it by doing blah, blah, blah, blah, blah. Right. So again, this is not the end of the world most, I mean, most of these things, right? If we’re talking about fraud or something, that’s something different.
But [00:15:00] if you know you made an incorrect entry in your accounting system, it’s not the end of the world. But let’s make sure we fix it and absolutely do not have that comment letter. Comment on the letter again. So, That’s what you get. The management letter is in addition to the audit. Now, typically the management letter is not for public consumption.
This is not what you’re posting on your website. It is for management. It is not for the public, but it is shared with your board. At least. I’ve always seen it shared with the board. Um, for sake of transparency and good governance. We wanna make sure the board is looking at that and is aware of, of any issues.
So now you have the management letter with your comments. You have the draft financials, and then it’s just time for your auditor to finalize everything. They put their logo and their signature and their stamp of approval on the audited financial. on the management letter, and now those are yours, You can post your audited financials on your website.
You can share them with your funders, You can use those numbers to. [00:16:00] You know, finalize your annual report. Again, the management letter usually stays internal. But now you have your audited financials that can go wherever you need them to go. So that’s the process. It’s not anything like, Super challenging.
Maybe there are some schedules that the auditors require some spreadsheets that are kind of tricky or that may be confusing. that’s where having a really solid finance team in your organization is gonna come in. Super handy. So if you haven’t listened to episode 1 0 9, your nonprofit finance Dream team, you probably wanna go back and listen to that. Because we talk about a number of positions that are gonna be really helpful in making sure that you’re super prepared for the audit.
Because I know organizations where the executive director has basically run the audit, and it’s not easy. It is not easy if you’re not a finance person in, in this stuff every single day. [00:17:00] So I hope though, I hope though that this gave you a lot more confidence in preparing for your audit. In going through your audit, if you haven’t done one before, and just knowing what results on the other side, hopefully it’s more funding because now you have audited financial statements.
Hopefully it’s better internal controls because now you have a second set of eyes. Hopefully it’s, you know, better managing your resources and improving your accounting practices, right? To me, it is all positive. So I hope this episode was useful. My friends and I will talk to you next time. Before you go, I just wanna thank you for being here.
To access our show notes and bonus content, visit 100 degrees podcast.com. That’s 100 degrees podcast.com, and I’ll see you next time.
