Why You May Need an Audit – and What You Should Get Instead

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Does the idea of a financial audit on your nonprofit leave you feeling nervous? For many nonprofits, a full financial audit can help ensure the accuracy of their financial recordkeeping. However, it can also feel invasive and overwhelming. Just the word itself can sound scary.

Luckily, not all financial situations require an audit. A reduced scope of attestation (or reduced scope of work) could be a better option for your organization. In this article, we’ll look at when you might need an audit and why an attestation service might make more sense.

Audit

Reasons Your Nonprofit May Need an Audit

Regulatory Compliance

One of the most common reasons for a nonprofit audit is to comply with state or federal regulations. Each state has a different threshold for nonprofits incorporated and registered within their states. In some cases, a state may have no requirement for an audit. In other cases, a state may require an audit for budgets as small as a few hundred thousand dollars per year. Here is a great resource to see if/when your nonprofit will need an audit. 

Grant Requirements

Some grant programs require an audit before awarding funds. Both government and private grants could require an audit, so it’s important to understand the funding requirements when applying.

Stakeholder Trust and Confidence

Regular independent financial audits of your organization can help keep your financial statements transparent. In turn, this helps maintain stakeholder trust in your organization.

Internal Governance and Oversight

Inaccurate records are one of the most common problems found in a nonprofit audit. Auditing your financial records regularly helps cut down on potential issues by catching inaccuracies before they become a problem.

Fraud Prevention and Detection

No one wants to consider fraud in their organization, but it could happen to anyone. Regular audits can help catch fraud–and potentially prevent fraud in the first place–by verifying transactions.

Is There an Alternative? Can a Reduced Scope of Attestation?

An audit is a deep dive into the financials of a business or organization. A reduced scope of work, on the other hand, works sort of like a slimmed-down version of an audit. There are two ways this is typically handled, and in some cases, they serve as an alternative to an audit: 

  • Review of Financial Statements:
    • This provides a limited level of assurance on the financial statements.
    • Your accountant will follow the necessary steps to obtain a reasonable basis for showing limited assurance.
    • This is a great choice when stakeholders require some level of assurance but don’t need the depth of a full audit.
  • Compilation of Financial Statements:
  • A compilation collects financial data and presents it in the form of financial statements without expressing any assurance on the accuracy of the information.
  • It is the most basic level of service and is used when there is no need for an independent third party to verify the information and internal management or stakeholders already have a good understanding of the organization’s financial activities.

Can a Reduced Scope of Work Replace an Audit?

If your board or organization shies away from an audit, you might be wondering if you can replace an audit with a reduced scope of attestation (or reduced scope of work). After all, wouldn’t it be easier to hire an outside accountant to simply look over a few areas of the books rather than digging through every financial record?

Whether you can replace an audit with a reduced scope of work depends on your organization’s needs and several factors, including:

  • How much detail and accuracy you need from the examination
  • The requirements of stakeholders or regulatory bodies
  • Budget and time constraints
  • Objective of the audit or inspection

1. Level of Assurance

An audit is a comprehensive examination of an organization’s financial statements and relevant financial information. Audits provide the highest level of assurance for your organization. If you need the utmost assurance of accuracy throughout your financials, an audit is likely the better choice.

Attestation provides a limited level of assurance for your organization. As a reduced attestation focuses on specific areas of your financials, you won’t get the comprehensive look offered by an audit. However, this hyper-focused approach might be the right option if you’re concerned about only a section of your records.

2. Regulatory and Stakeholder Requirements

When choosing between a full audit or reduced attestation, one thing to consider is your regulatory requirements. Many regulatory bodies may require one or the other specifically to stay in compliance.

Likewise, your board of directors or other stakeholders may require a full audit. In situations where it isn’t required, however, a reduced scope of work can be a cost-saving alternative.

3. Cost and Resource Considerations

In general, audits are more resource-intensive and expensive than a reduced scope of work. As a comprehensive look at your financials, they require more time and resources to complete, leading to a higher cost.

A reduced scope of work might be a good alternative if your organization lacks the financial, administrative, or time resources for a full audit.

4. Specific Objectives

Audits provide a broad and thorough examination of an organization’s financial health and operations. While this can be helpful if you need to see the overall health of your finances, you may not need all the information it provides.

Reduced scopes of work can be suitable if your organization has specific areas of concern within your financials. For example, you may want to verify the accuracy of donations for the last quarter.

Audit

The Charity CFO Can Give You Peace of Mind

A reduced scope of work can’t completely replace an audit. In some cases, your organization may need one to secure funding, stay in regulatory compliance, or maintain accurate records.

However, an attestation service can be a great alternative for many organizational functions, including:

  • Analyzing specific financial areas for fraud or inaccuracies
  • Cost savings for regular financial checkups
  • Meeting grant, financing, or regulatory requirements that don’t require a full audit

In fact, attestation could help you avoid the fear of an audit–especially when presenting financial needs to your board or other stakeholders.

Do you need an audit or attestation? In some cases, simply having an outside firm handling your financial management can provide the peace of mind your organization needs. Get in touch with The Charity CFO to see how we can help maintain accurate records for your nonprofit today.

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Conflicts of Interest: Why it’s Important and How Often it Should be Done

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Addressing conflicts of interest in a nonprofit is essential for success. It directly impacts the credibility, public trust, and overall effectiveness of the nonprofit in achieving its mission. By actively identifying and managing conflicts of interest, these organizations can protect their credibility, maintain donor confidence, and ensure that their resources are utilized solely for the benefit of their intended recipients. 

This article emphasizes the importance of addressing conflicts of interest in nonprofit organizations and how often it should be done.    

What are Conflicts of Interest?

A conflict of interest in a nonprofit organization occurs when an individual’s personal interests or loyalties interfere (or potentially interfere) with their objective decision-making in their capacity as a representative or member of the organization. This conflict may arise when a person’s financial, familial, or personal relationships create a competing interest that could compromise their ability to act in the best interest of the nonprofit and its beneficiaries. 

An example of a potential conflict of interest in a nonprofit is when a church accepts pass-through gifts. Although they may be well-intended to help a member of the congregation, churches often have little control over the funds and how they are used. These gifts or funds can be misused or lead to other ethical issues if not handled correctly.  

Failure to address conflicts of interest can result in internal and external dysfunction within the nonprofit organization, potentially causing disruptions in its operations and relationships with stakeholders. Not to mention the integrity is compromised, leading to a bad reputation and loss of public trust. Moreover, in some cases, unmanaged conflicts of interest may lead to legal complications, subjecting the nonprofit to potential legal issues and regulatory investigations.

Understanding Legal and Ethical Obligations

Nonprofits must be well-versed in the specific legal requirements and regulations governing conflicts of interest to avoid potential legal pitfalls. Additionally, nonprofit directors have three primary fiduciary responsibilities: duty of care, duty of loyalty, and duty of impartiality-  to act in the best interest of the organization. Beyond legal obligations, ethical considerations play a central role in ensuring fair and unbiased decision-making and fostering an environment of trust and accountability.

Identifying and Disclosing Conflicts of Interest

Encouraging proactive identification of potential conflicts of interest empowers stakeholders to address issues early on, minimizing the risk of undue influence on decision-making. Establishing clear policies and procedures for disclosing conflicts of interest provides a structured framework for individuals to come forward with relevant information, ensuring transparency and accountability. Open communication within the organization guarantees that conflicts are managed appropriately, helping to uphold the nonprofit’s mission and maintain the confidence of donors, beneficiaries, and the public.

Evaluating and Managing Conflicts of Interest

Evaluating and managing conflicts of interest requires conducting thorough and impartial evaluations to understand the extent of the conflicts. It is essential to assess their potential impact on decision-making processes and the overall integrity of the organization. Once conflicts are identified, implement appropriate measures to manage and mitigate them effectively. If necessary, decisive action should be taken promptly and impartially to address any conflicts that arise, ensuring the organization’s continued adherence to ethical standards and its mission-driven objectives.

Establish Strong Conflict of Interest Policies

Implementing defined conflict of interest policies helps ensure the decision-making process remains unbiased and aligned with the nonprofit’s mission. Promoting transparency and monitoring potential conflicts builds trust among stakeholders, demonstrating the organization’s commitment to ethical conduct and responsible stewardship of resources.

A comprehensive approach should define conflicts of interest, provide specific examples, and detail procedures for disclosing and managing potential conflicts. It is essential to ensure that all directors and stakeholders thoroughly understand the policy’s provisions, their responsibilities, and the possible consequences of non-compliance. Regular reviews and frequent check-ins enable the board to adapt to evolving circumstances and reinforce a culture of accountability and adherence to the guidelines.

How Does the Board Come into Play?

The board of directors plays a crucial role in managing conflicts of interest within a nonprofit organization. They are responsible for understanding and upholding the policies, ensuring compliance among all stakeholders, and making decisions that prioritize the organization’s best interests. The board exercises oversight by regularly reviewing and updating conflict of interest policies and disclosures, as well as conducting periodic self-assessments to evaluate their performance in handling conflicts and identifying areas for improvement. By actively fulfilling these responsibilities, the board reinforces the organization’s commitment to transparency, accountability, and ethical conduct.

Annually Review Conflicts of Interest

By conducting regular reviews, the organization can assess its policies and procedures, identify any potential gaps or emerging issues, and proactively address conflicts before they escalate. This practice emphasizes prioritizing the organization’s mission over individual interests and fosters a culture of accountability and trust among stakeholders. Through transparent and ethical decision-making, nonprofits can strengthen public confidence, attract donors, and ensure they remain true to their charitable objectives, making the annual review an indispensable process in the governance of nonprofit organizations.

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Independent audit requirements for a nonprofit

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The word audit can invoke instant fear and dread. Whether it’s an IRS audit, external audit, or even an internal audit, the process can feel burdensome and worrying. However, with the right tools and preparedness, there’s no need to worry. 

Contrary to popular belief, most audits are not conducted to detect a problem. They are actually useful tools to ensure that an organization is in compliance and can also be used to identify potential problems before they become too big. 

The IRS does not require nonprofit audits in most cases, however, they may periodically request an audit (examination) or a compliance check. 

Should My Nonprofit Obtain an Independent Audit?

If the IRS doesn’t require an audit, you may wonder why you might put your organization through this process, as cumbersome and time consuming as it can be. However, there are a few reasons why you might need to conduct an independent audit to remain in compliance with your organization’s other obligations. 

  • Bylaws: The bylaws of your organization may have been outlined to require regular audits to ensure transparency, security and confidence in the financial standing of the organization. 
  • State Governments: Depending on the state you operate in and the funding you receive, you may be required to conduct an independent audit.
  • Federal Funding: If your organization receives $750,000 or more in federal funding, you are required to have an independent audit conducted.
  • Private Foundations: Some may require nonprofits to conduct an independent audit
  • Grant Recipients: If your nonprofit has received funding from grants, some may require audits to ensure that they can have confidence in the financial aspects of the organization that they have provided this money to. 
  • Proof of Financial Status: Additionally, other funding sources or applications might require proof of financial management, solvency, transparency and compliance. While they may not specifically state that an audit is required, this is a great way to fulfill that obligation. 

Selecting an Audit Firm

Once your organization has decided to obtain an independent audit, the real work begins. Taking steps to make sure that you are working with the right audit Firm is important. Do your research and select Firms that specialize in nonprofits. 

  • Outline your requirements – be detailed about what you are looking for from an external audit firm.
  • Send out RFPs – select three to five Firms that you believe could conduct the audit properly and send them an RFI/RFP to determine their qualifications, approach, and fee structure.
  • Interview potential Firms – give your organization and your accounting team the opportunity to interact with the potential auditors to determine if they are a good fit.
  • Make your selection – select the Firm that you believe can fulfill your specific audit requirements and are aligned with your goals to provide accurate, transparent, and clean financial statements.
  • Sign an engagement letter. This should include:
    • An outline of services to be performed
    • Responsibilities of staff and auditors
    • Fee Structure
    • Start date, milestones, and end-dates

How to Prepare for an Audit

In the nonprofit world, audits are a normal course of business and should not be something to be nervous about. With appropriate planning, they can go smoothly. As soon as you know that you will be obtaining an independent audit, begin the planning process. 

  • Conduct pre-audit meetings with the auditor, the oversight committee, and any staff that will be involved in and responsible for items requested throughout the audit. 
  • Receive a listing from the Firm of documentation that they will require
  • Pull and obtain the documentation before the start of the audit to the best of your abilities to avoid delays and confusion.
  • Have staff readily available to answer questions and provide clarification to auditors. 
  • Stay ready year round and with an audit checklist and roadmap.

After the audit, make the appropriate adjustments and continue to keep up with the suggestions that are made.

Implementing and making changes to your processes and internal controls after an audit can help make future audits even more successful and ease the stresses that these can cause. These changes can also provide the following benefits. 

  • Transparency: Communications regarding your audit and the changes that are being made can boost confidence and assurances in your donors and supporters. They can feel good knowing that you are properly taking care of and using their contributions appropriately. 
  • Accountability: Regularly scheduled audits keep your organization accountable for consistent accurate reporting
  • Improvements: Finding opportunities for improvement in policies and procedures is an added benefit to audits that can result in additional efficiencies and better usage of resources. 

Other Types of Audits to Support Compliance

While the independent external audit is the most familiar to nonprofit organizations, the following can also support your compliance efforts.

Internal Audit

These are conducted by staff within your organization and can help identify opportunities for improvement in many different areas. Internal audits allow organizations to remove themselves from everyday tasks and take a look at the big picture to more effectively and efficiently manage their operations and achieve their mission. 

Financial Audit

Financial audits are useful in evaluating your organization’s financial statements and reporting. They can help understand and showcase the health of your organization and work to improve it. These can also examine your internal controls to ensure financial security and stability.

Compliance Audit

Compliance audits are conducted to review adherence to regulations and requirements set by your bylaws, the federal, state, and local governments, as well as other compliance requirements. Ensuring that you remain in compliance is an important task, as noncompliance can have huge risks. 

Operational Audit

These can assess your organization’s systems, productivity, staffing, IT, HR, and other functions and can provide operational insights that are invaluable to the growth and success of your nonprofit. 

Whether or not an audit is required, they can be useful tools in determining the financial health of your organization, providing transparency and assurances, and discovering process and efficiency improvements to make sure your organization is performing its best to fulfill its mission. If you need audit support, The Charity CFO and its experts are always available. 

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Nonprofit Tax Filing: 7 Steps to Peace of Mind

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Most people dread filing taxes. The piles of paperwork, long hours, and complicated tax codes can be truly overwhelming. Nonprofit leaders have an especially hard time understanding, preparing and filing their returns. They’re ever busy trying to make a positive difference in their communities, which is why tax filing often comes as an afterthought.

You see, a 501 nonprofit corporation is recognized as tax-exempt by the IRS but this doesn’t mean they are exempt from filing taxes. Most still need to file a tax return to maintain their nonprofit status and keep their organization tax compliant.

Fortunately, filing taxes for a nonprofit doesn’t need to be stressful. By following these 7 steps to nonprofit tax filing, you can sail through the process and get your taxes done quickly and easily.

Start With the Fundamentals of Nonprofit Tax Filing

Non-profit organizations operate in many areas of society, including education, healthcare, sports, and social services. While dozens of nonprofit exempt statuses exist, they generally fall under 5 types of nonprofits, including;

  • Religious and church
  • Charitable
  • Private foundations
  • Political organizations
  • Miscellaneous nonprofits such as charitable risk pools,  Federal Credit Unions, hospital service organizations, and retirement funds

These nonprofit categories fall under the following tax-exempt status:

  • 501(c)(3): Charitable, Religious, or Educational Organizations
  • 501(c)(4): Community social welfare organizations
  • 501(c)(6): Business leagues, professional associations, real estate boards, and board-of-trade organizations.

Each has its own set of tax laws, regulations, and forms to fill out. As you prepare to file taxes, make sure your organization falls into the correct classification.

But why is this really important?

  • To ensure that you don’t lose your tax-exempt status, which allows your organization to have an exemption from paying taxes.
  • To avoid late filing penalties that can quickly add up depending on the amount the organization has received during the calendar year.
  • To stay compliant with various state and federal regulations.
  • To maintain good governance practices and requirements
  • To demonstrate financial transparency to your donors, members, and the public

To make sure that your organization complies with the taxman, you should file IRS Form 990 by May 15 each year. This form allows the IRS and the general public to track a nonprofit’s finances, management practices, and governance structure.

The type of Form 990 to be filed depends on the gross receipts of the organization within that filing year. These forms include:

  • Form 990 or 990-EZ: Filed by large organizations with gross receipts of more than $50,000
  • Form 990-N (e-Postcard): Filed by small organizations with gross receipts of $50,000 or less
  • 990-PF: Filed by private foundations

Take a Year-Round approach

Many nonprofits make the mistake of waiting till the last minute to prepare and file their taxes. Unfortunately, if you wait until the last minute you are more likely to make mistakes, overlook important information, and experience unnecessary stress and anxiety.

Instead, develop a year-round strategy for filing taxes that keeps your organization on track throughout the entire tax filing process. This includes:

  • Tracking all income and expenses
  • Making sure your accounting matches your bank statements
  • Keeping up with deadlines
  • Reviewing your past tax returns to identify any mistakes
  • Staying up-to-date on the latest changes in tax regulations
  • Preparing an accurate budget and financial statements

Tracking expenses

Tracking expenses help nonprofits to maximize their resources and solve more challenges for the communities they serve. Careful tracking also makes tax filing easier by allowing organizations to quickly find the information they need when filling out their forms.

Invest in the correct processes, policies, and technologies to ensure all expenses are tracked and recorded accurately, including:

  • Reconciling all bank account and credit card statements
  • Ensuring that receipts are collected for all expenses
  • Run policy checks on specific project expenses
  • Categorizing each expense correctly

Tracking Revenue

Another measure to avoid stressful filing is by keeping up with the organization’s revenue streams. NPOs should track all donations, grants, and investments made to their organization to make sure they are properly accounted for.

Nonprofits should also keep records of when these donations are made and what type of payment was accepted (cash, check, or credit card). This will help when preparing the tax returns, as well as ensure that donations are properly recognized and acknowledged.

You’ll also need to understand how and when to recognize different revenue streams. Proper revenue recognition is a core accounting principle that ensures proper financial reporting, ensuring that you remain compliant and maintain donor confidence.

Monthly Financial Reporting

Maintaining accurate and timely financial reporting is one of the most effective ways to keep your organization in compliance and ready for tax filing.

Monthly financial statements can have a clear view of your financials and stay on top of your organization’s future expenses. This complete visibility of financial information at all times is necessary to maintain a strong cash inflow and help make informed economic decisions.

According to GAPP, some of the most recommended financial reports that you should generate monthly include:

  • Statement of activities
  • Statement of cash flows
  • Statements of financial position
  • Statement of functional expenses
  • Donor reports
  • Marketing reports

Pay Quarterly Estimates

Most nonprofits do not have to pay federal or state income taxes, but they may still have to pay quarterly estimates if they engage in activities that generate unrelated business income.

According to the IRS, a nonprofit organization must pay quarterly estimated tax on unrelated business income if it expects its annual tax to be more than $500. This Unrelated Business Income Tax, or “UBIT”, is calculated on the organization’s net income from unrelated activities and is due each quarter.

Use Form 990W to determine your estimated tax payments. It’s important to ensure that your organization is paying the correct amount of taxes each quarter. Failing to pay estimated taxes on time can result in huge interest and penalties that could jeopardize your nonprofit’s financial health.

Work with a Trusted Expert for Peace of Mind

Filing taxes for a nonprofit organization can be challenging, time-consuming, and worst of all, stressful. You don’t want to make any mistakes that could trigger an audit or even the loss of your 501(c)(3) status.

That’s why it’s important to work with an experienced tax professional who understands the specific needs of nonprofit organizations. A trusted expert can help guide you through the filing process and make sure all of your documents are accurate and complete.

At TheCharityCFO, we have experienced professionals that help nonprofits just like yours stay on top of their taxes and meet filing deadlines. Our team can provide comprehensive tax and financial guidance to help your organization remain in compliance with all state and federal regulations.

Contact us today to learn more about our services and how we can help you achieve peace of mind with your nonprofit’s tax filing. 

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Revenue Recognition for Nonprofits: 4 Mistakes to Avoid

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Revenue recognition for nonprofits may seem fairly straightforward, but has unique complexities with important compliance consequences.

Nonprofits rely on a mix of sources for their income, from fundraising, grants, and investments to earned income and individual contributions. All these sources must be carefully managed to ensure compliance with Generally Accepted Accounting Principles (GAAP) and guidelines.

Understanding how and when to recognize different revenue is perhaps one of the most important but difficult aspects of managing a nonprofit’s finances.

Revenue recognition is an accounting process of properly identifying when income has been earned. This accounting principle outlines specific criteria that must be met before revenue can be recorded in financial statements. Failing to recognize revenue properly may lead to inaccurate financial reporting, which could result in penalties,  restrictions, and audits.

Here are four common mistakes to avoid with revenue recognition for nonprofits:

4 Revenue Recognition for Nonprofits Mistakes

Not Recognizing Revenue at the Right Time

When it comes to nonprofit revenue recognition, timing is everything. It’s important to recognize revenue when it’s earned and not before or after. If you recognize revenue too early, you could be in violation of Generally Accepted Accounting Principles (GAAP).

Your organization’s accounting method really impacts the timing of recognizing transactions. For example, if your organization uses the accrual method of accounting, you must recognize revenue when it is earned, and the obligation has been fulfilled.

When using the cash basis method,  revenue is only recognized when cash or its equivalent is received.

This means that if you receive a pledge from an individual or organization but haven’t received the money yet, you won’t be able to recognize revenue until the cash is received. This makes it easy to handle multi-year pledges, where you can recognize the revenue for each year as cash is collected.

Not Understanding the Difference Between Cash and Accrual Accounting

Cash accounting is a method of recording income and expenses when they are actually received or paid out, while accrual accounting records income and expenses when they are earned or incurred. Nonprofits must understand the difference between these two methods in order to record their revenue properly.

When using the cash method of accounting, financial information is presented solely based on the cash received. As a result, it is important to accurately track all sources of income and not assume that just because an individual or organization has promised to donate, the money has been received.

This is a more straightforward option since it only follows money actually going in and out of your accounts. It is mostly recommended for small organizations with simple transactions that don’t require a detailed understanding of revenue recognition.

The cash method of accounting is generally preferred for:

  • Small nonprofits with under $100,000 in revenue
  • Nonprofits that do not have set programs
  • Nonprofits that do not have paid staff
  • Nonprofits that don’t have accounting professionals

Conversely, the accrual accounting method records transactions when they are incurred, not just when cash is received. This method allows you to recognize revenue that has been pledged or earned but not yet collected. You also recognize expenses when they’re incurred, not just when the money is paid. This method of accounting provides a more complete picture of your finances and is required by most states for organizations over certain income thresholds.

Accrual accounting allows you to match your expenses to the revenue they generate, so you can make more informed decisions and better projections. This explains why it is the most recommended option required by Generally Accepted Accounting Principles (GAAP) for nonprofits.

This method is an excellent option for nonprofits that:

  • Have significant amounts of funding and funding sources
  • Receive grants
  • Employ paid staff
  • Undergo annual financial audits
  • Want to ensure accuracy and full transparency

Not Documenting Donations Properly

Donations are a major source of revenue for nonprofits. This is why it’s important to understand how to properly record each donation to remain in compliance with GAAP. You must include the donor’s name, date of the donation, donation amounts, and any restrictions on how the money can be used.

In particular, restrictions by a donor can affect the timing of your revenue recognition. For example, if a donor restricts their donation to be used for a specific purpose and the money has not been spent yet, the revenue cannot yet be recognized.

It is important to document these restrictions and create a plan for how the money will be used in order to properly recognize the revenue. You should also keep records of all donor acknowledgments and correspondence as required by the IRS for tax purposes.

Ideally, have a dedicated person or team to manage donation tracking, acknowledgments, and compliance. This will help ensure that your revenue recognition is accurate and you remain compliant with the IRS. A  donation management system can make this process a lot easier and can help you keep track of donations more efficiently.

Not Tracking Unrestricted Funds Separately

Unrestricted funds are those that can be used for any purpose by the nonprofit organization, while restricted funds must be used for specific purposes as designated by the donor.

Unrestricted funds can be used for overhead costs like expanding staff, training and professional development, equipment, emergency expenses, technology acquisition, etc.

It’s important to track unrestricted funds separately from restricted funds so that you don’t accidentally use them for something other than what was intended by the donor.

But how do you track these funds? The best way is to use an accounting system that segregates your accounts and allows you to easily categorize donations as either unrestricted or restricted. This will help you keep track of donations and ensure that revenue is allocated correctly.

Trust The Charity CFO Revenue Recognition for Nonprofits

Revenue recognition can be tricky, which is why it’s important to have an experienced finance professional handle the accounting for your nonprofit.

The Charity CFO offers a team of experienced CFOs and accountants who specialize in helping nonprofits manage their finances. Our experts have extensive knowledge of GAAP and can help you ensure that your revenue recognition is accurate and compliant.

We understand the complexities of revenue recognition for nonprofits and can help you manage your finances more efficiently. Contact us today to learn how our services can help your nonprofit organization.

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Best Practices when Accounting for Grants

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Grants are the lifeblood of nonprofits, giving them the much-needed cash injection to market the organization, fund a project, or get an initiative off the ground. Having a full grant pipeline increases your nonprofit’s chances of success and improves your visibility and credibility. But in order to get the most out of these grants, you need to understand how to properly manage and account for them.

The IRS has strict regulations on how to handle grants and charitable contributions, so it is essential that you understand the best practices when accounting for them.

Why?

Because accurate nonprofit accounting can help with reporting and auditing requirements, and ensure that the funds are being used in accordance with the grantor’s wishes. Besides, proper accounting gives you a clear picture of your organization’s fiscal health and helps you to make informed decisions on how to allocate resources.

Nonprofit leaders can use the for-profit world’s valuable practice of engaging in succinct and clear grant reporting. You really don’t want to be red-flagged by the government because of incomplete, unorganized, or inaccurately recorded grant information.

What is a Grant?

A nonprofit grant is a type of financial assistance that your organization receives from government agencies, foundations, corporations, businesses, individuals, or educational institutes for a nominated project, program, or initiative. It is usually given in exchange for specific deliverables and outcomes.

It encourages collaboration between your nonprofit and the funder, and gives the funder some control over how the funds are utilized and sets the ground for future funding. Responsible stewardship of grant funds will usually lead to raising more grant money from the same or other funders.

Grants may include:

  • Investments relation to programs
  • Prizes
  • Awards
  • Scholarships
  • Fellowships
  • Research
  • Training
  • Mentoring programs
  • Outreach initiatives
  • Loans for charitable purposes

A grant will not include donations or contributions for unrestricted use or general operating support as these are not exchanged for any specific deliverables. Since they are project specific, they cannot be used to pay employees, compensate your board, or cover your organization’s operating costs.

According to the Financial Accounting Standards Board (FASB) guidelines, a grant should be recognized as revenue when all eligibility requirements have been met by the recipient and there is reasonable assurance that the revenue will be collected.

Major Types Of Grants

The three major types of grants are unconditional grants, conditional grants, and reimbursable grants.

  • Unconditional grants are those which do not require the recipient to provide a specific deliverable or outcome in exchange for the funds. The recipient is under no obligation to fulfill any conditions or submit any reports.
  • Conditional grants have designated deliverables or outcomes that must be met in order to receive the funds. Recipients are usually required to submit periodic reports on their progress and results.
  • Reimbursable grants are those which require the recipient to provide evidence that it has already incurred costs before receiving reimbursement. Reimbursement is usually provided after the recipient has provided evidence that it has met all conditions, or completed the deliverable.

8 Best Practices When Accounting For Grants

The following are some best practices that all nonprofit leaders should follow when accounting for grant funds:

1. Make sure your team is on the same page

Set clear and consistent expectations with your team when it comes to accounting for grant funds. This means that everyone should understand the procedures, deadlines, and any other expectations related to accounting for grants. Establishing clear roles and communication protocols can help ensure that all team members are in alignment when it comes to grant accounting.

2. Put the necessary controls in place

Accounting for grants should be approached with an abundance of caution. Establishing sound internal controls is essential for ensuring the financial security, accuracy, and completeness of your records related to grants. This includes having a separate bank account for grant funds, segregating duties among different team members, and having adequate documentation of all grant-related transactions.

3. Track expenses diligently

When accounting for grants, it is important to track expenses diligently. This means having effective systems and processes in place for tracking grant expenditures, documenting grant-related activities, and making sure all expenses are properly classified. Doing this ensures that you can demonstrate compliance with grant requirements and provides a clear audit trail for any future reviews.

4. Develop strong financial reporting procedures

An efficient tracking and reporting system is a must-have in order to ensure accuracy and compliance when accounting for grants. Think routine summary reports, budget vs. actual reports, and variance analysis—all of these can help your team identify any discrepancies or issues related to grant accounting.

5. Keep up with changing compliance rules

Grant accounting can be complicated, and regulations are always changing. It is important to stay on top of any new compliance regulations by regularly reviewing the grant agreement, monitoring any developments in the industry, and proactively addressing potential issues. If you don’t have sufficient internal capacity and resources, you may want to consider hiring a nonprofit accounting professional to help manage your grant accounting.

6. Use the grant in a manner that complies with all applicable laws and regulations

It is important to keep in mind that grant funds must be used for their intended purpose and in accordance with all applicable laws and regulations. Grants should not be used in any way that could be perceived as fraudulent or unethical. As the grant recipient, you are responsible for understanding and following all applicable laws and regulations.

7. Be transparent in all financial matters related to the grant

Transparency is key when it comes to grant accounting. Make sure that your team is open and responsive to questions related to the grant account. Provide regular updates to the grantor, and be sure to document all decisions related to the use of grant funds.

8. Conduct regular audits

Regular financial audits can help ensure the accuracy of your financials, determine your fiscal health and compliance, and identify any potential issues. Having an independent audit team review your records related to the grant can help protect your organization from any unforeseen problems. These audits can also help identify opportunities, such as potential areas of cost savings.

What Are The Main Challenges Of Grant Accounting?

Grant accounting can be challenging, especially for smaller organizations with limited resources. Some of the main challenges that organizations may face include:

  • Keeping up with changing grant regulations and compliance requirements
  • Staying organized when dealing with multiple grants from different sources
  • Meeting reporting deadlines and ensuring the accuracy of reports
  • Differentiating between grants and other sources of income
  • Tracking expenditures against budgeted amounts
  • Understanding accounting rules, such as those related to matching funds, split funding, and indirect costs
  • Knowing which expenses are allowable under the grant
  • Managing cash flow during long grant cycles 

These challenges can be daunting, but proper grant accounting practices can help organizations overcome them and ensure successful grant management. With the right processes in place, your organization can benefit from increased accountability and transparency, improved grant performance, and more efficient use of funds.

Feeling Stuck? Outsource Your Grant Accounting Needs To A Professional

Rolling all the responsibilities to an inexperienced person not only jeopardizes the organization’s fiduciary responsibility but also the sustainability of the organization.

If your team lacks the resources to effectively manage grant accounting, you may want to consider outsourcing these responsibilities. Experienced nonprofit accounting experts can help you develop and manage an effective grant accounting system and processes and provide guidance on best practices to ensure compliance and properly handle grant accounting responsibilities.

At The Charity CFO, we understand the complexities of grant accounting and bring our expertise to help your organization manage its grants in a way that complies with all regulations and provides maximum benefit for the organization.

By partnering with us, your organization can be assured that its grant accounting and financial management are in safe hands. We provide timely, accurate, and reliable services with high fidelity to your organization’s mission and values. Our team is dedicated to helping you achieve greater fiscal health, greater transparency, and improved service delivery for your organization.

Contact us today to learn more about how we can help with your grant accounting needs so you can focus on driving your mission and making an impact!

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Nonprofit Audit Checklist (+ Free PDF Download)

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Many nonprofit organizations both large and small need to undergo a financial statement audit every year. Preparing for a nonprofit audit can be overwhelming and anxiety-filled, especially if it’s your first audit or you don’t have a strong and experienced financial team.

But an audit doesn’t have to scare you or your management team. The most important thing you can do is be prepared. That’s why our in-house team of 6 former nonprofit auditors helped put together this guide to nonprofit audit checklist to make sure  your audit goes as smoothly as possible.

What is a financial statement audit? And do you need one? 

This article will discuss financial statement audits for nonprofit organizations. We won’t deal with other types of nonprofit audits, like compliance audits or governmental audits, which can differ in certain respects.

A financial statement audit is a thorough review of your financial statements to determine if your financial statements present fairly, in all material respects, in accordance with generally accepted accounting principles. The purpose of a financial statement audit is NOT to detect fraud.

If you’re not sure if your nonprofit needs an audit or not, follow this link to find out about nonprofit audit requirements. And if you know you need an audit and want to be prepared, keep reading!

How to prepare for your nonprofit audit:

Step 1: The Roadmap

Before we jump into the specific items to prepare, let’s look at the timeline for preparing for a nonprofit audit. You need to get started early (up to a year ahead of time, if you don’t already have a relationship with a CPA for your audits) to ensure everything runs smoothly.

Here are some of the milestones you should prepare for:

nonprofit_audit_timeline

️ 6-12 Months Before Year-End

Send out an RFP and hire an independent firm to conduct your financial statement audit. 

It’s getting harder to find CPA firms that conduct nonprofit audits, and their schedules fill up quickly. So don’t expect that you’ll find an available firm at the last minute. Ask your network for recommendations if you don’t know a firm and try to get someone lined up at least 6 months in advance.

️ 2 to 3 Months Before Year-End

The audit firm will do preliminary testing, familiarize yourself with your organization and ask for additional documentation.

Try to be as cooperative as possible with this vital step in your nonprofit audit prep. Your CPA firm will have its own audit checklist of things they need to accomplish now to complete your audit correctly and on time. Holding back information or not being responsive may delay your audit or cost you more money.

️ 2 to 3 Months After Year-End

The audit firm will come in to review your final end-of-year numbers and all the documentation they need to complete your audit.

Once again, be as cooperative as possible and set aside time to work with your firm and get them all the documents they need. If you’re not available, the auditors can’t do their jobs and may even suspect that there’s something you don’t want them to find.

Step 2: The nonprofit audit checklist

The easiest way to be prepared for an audit is to stay ready. That means keeping your paperwork organized, staying current on your reconciliations, tracking restricted funds, and accurately recording all your expense and revenue transactions each month.

PRO TIP: If your internal team can’t keep up, you can always consider an outsourced nonprofit accounting service to keep your books audit-ready.

Here is a checklist of things to do to be prepared for your nonprofit audit: the things you’ll want to do before handing your books off to the auditors:

  • Examine your prior-year balance sheet in the accounting software to ensure that every balance agrees with the prior year’s audited balance sheet. Investigate any discrepancies and remedy them before moving on.
  • Examine all account balances to ensure they are reasonable based on your knowledge of the business, i.e. Does the revenue reflect what you actually collected? Do your bank account and/or loan balances look accurate?
  • Reconcile all ending permanent account balances–like assets, liabilities, and net assets–to internal records, wherever possible. (Permanent accounts, or Real Accounts, are accounts that maintain ongoing balances over time. For more detail, refer to this article on permanent accounts.)
  • Examine all bank reconciliations for outstanding transactions which could be erroneous
  • Examine accounts receivable (A/R) aging summary for reasonableness
  • Examine accounts payable (A/P) aging summary for reasonableness
  • Record any year-end accrual adjustments, such as any required for Paid Time Off (PTO)
  • Record any year-end reclassification adjustments, such as any required to present current and noncurrent assets and liabilities appropriately.
  • Examine significant donor agreements for potential restrictions and ensure those funds are recorded correctly
  • Reconcile net assets (with and without donor restriction)
  • Examine the general ledger for expenses that should have been capitalized, income that should have been recorded as liabilities, or other unusual transactions
  • Examine A/R and A/P as of the balance sheet date and expense/revenue transactions in the three months subsequent to the balance sheet date to ensure transactions were recorded in the appropriate year.
  • Identify any income and expense transactions that are not classified to a program or supporting service category and classify them appropriately.

NOTE: If your books are a mess and you need to get them cleaned up ASAP, check out this podcast with our onboarding manager Isabel Sippo for tips on how to clean up the financial skeletons hiding in your closet:

 

Listen here: https://thecharitycfo.com/cleaning-up-the-skeletons-in-your-financial-closet/

Step 3: Post-audit adjustments & reviewing the report

Before issuing the final audit report, the auditors will issue a draft of the audited financial statements and any necessary audit adjustments. You should meticulously review each proposed reclassification or adjustment to ensure they are reasonable and accurate.

Don’t just assume the auditor is right. They may be, or there could be something they misunderstood. Additionally, understanding why your auditor made a change can help you get it right up front next year.

After reviewing and agreeing to any audit adjustments, you should record the adjustments in your accounting system. And review the financial statement draft for the following:

  • Totals are calculated correctly
  • There are no spelling or grammatical errors in the footnotes
  • Every number agrees to the relevant account balance or general ledger transaction

Download the free PDF of our nonprofit audit checklist to share with your team!

audit_checklist_download

Are you ready to fulfill your nonprofit audit requirements?

If your finances aren’t up to date or nobody on your team can confidently tackle the points on this checklist, then you may need help to get ready for your audit.

At The Charity CFO, we don’t perform audits, or audit-prep account cleanup for non-clients. But we do help our partners clean up, modernize and optimize their accounting systems as a part of our extensive 4-week onboarding program. 

And we help ensure our partners’ books are always audit-ready each month, so you don’t lose any sleep when it’s audit season.

We also have 6 former nonprofit auditors on staff, so our team is trained to prepare your financial reports precisely how an auditor wants to see them. That helps you save back-and-forth during the process and helps avoid incurring additional expenses during the audit.

If you’d like to consider outsourcing your accounting to the nonprofit financial experts, reach out to us today to request a free consultation. We’ll let you know how and if we can help make your next audit stress-free!

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The Different Types of Audit Services and What They Mean For Your Nonprofit

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Are audit services on your mind as a nonprofit organization leader?

Do you run a non-profit and worry about your fiscal fitness? Are your productivity and scalability as efficient as it could be? If you’re concerned about these things for your organization, then you should consider an audit.

As a non-profit, you owe it to your donors to stay as lean and as efficient as possible. And in order to maintain your NPO status, you need to keep good record books. So enlisting outside audit services can be just what you need to be successful.

And don’t worry if the mention of an audit sent a shudder down your spine. We get it, nobody likes the idea of getting audited, but outside of the IRS, an audit can be a valuable tool to assess your current situation and look at the areas that can be improved.

If you’re concerned about how to fully utilize an audit, keep reading. We’ve got you covered on the different types of audit services as well as how they can benefit you and your organization.

Four Different Types of Audit Services

Nobody likes the idea of an audit. However, when it comes to maintaining the financial health of your nonprofit business, audits are necessary. An audit can take less time if you can keep your financial paperwork organized and thoroughly documented.

There are several different types of audits that are done by different people and will give you different outcomes based on your goals. Some audits are done internally while others are external and require an outside point of view.

When many people think of audits they think of accountants scrutinizing your finances. But operational audits are also just as valuable to your organization.

1. Operational

An operational audit will look objectively at the systems and functions of your business. The audit will assess your business’ systems and productivity as well as your available resources. They will then make their recommendations for how these areas can be improved and what additional resources will be necessary to make the changes needed.

Operational audits can look at your systems and processes as well as your various departments; these can include IT, HR, and staffing. Additionally, if you find your organization continually missing your goals and objectives, then an operational audit can shine a light on this. You can learn why these goals weren’t met and what can be changed to start meeting your goals and objectives in the future.

2. Financials

A financial audit will evaluate your current financial situation for your business or nonprofit organizations. After their complete assessment, they will give their recommendations for how you can improve the fiscal health of your charity.

They will look at your accounting records as well as your financial reporting of accounts receivable and payable. So, it is vital to keep good records so you can get an accurate assessment of your financial situation within your nonprofit.

If you want your nonprofit to help as many people as possible, you must be fiscally responsible year after year. If you find your organization continually behind with your accounting then the help of a CPA can benefit your company.

A professional bookkeeper will help you keep your records so that you never again dread another audit. Audits are helpful and beneficial tools for your company. And having good records can make them smooth and seamless which will allow you to learn from them rather than stressing out about getting them the right records for their audit.

3. Internal

An internal audit is usually done by and for the management of your company. This form of assessment gives light to how your company can make improvements and grow in the company years.

Regular internal audits are important to shine lights on possible areas of growth within your company. It doesn’t do your business any good to continue to do things as they’ve always been done when there is a better way of doing it.

In order to truly grow your company and help more people with your non-profit, you need to continually be open to new ways of doing things.

4. External

An external audit is done by a neutral third-party person or group looking at your business or nonprofit from an outside point of view. These audits are just as important as internal audits and will provide your company with a much-needed alternate viewpoint.

Additionally, by conducting an external audit you open your business up to learning about possibly blind spots that you hadn’t noticed before. This external point of view is vital to growing a healthy business so don’t shy away from it. It can be difficult to ask the opinion of someone outside of your organization, but it is imperative to healthy growth.

By bringing in an external CPA to look at your records regularly you can ensure that your charity will be able to help as many people as possible. While it can be difficult to bring in an outside group of people to dive into your finances, this is a vital step to providing valuable insight and reassurances that you’re operating a successful business.

Keeping good records in accounting software is vital to quick and easy audits. Additionally, having a bookkeeper can improve your audit experience. By having a professional help you keep good records in an organized manner can help you to have a better audit.

Bottom Line: Keep Your Business Financially Healthy

As you can see an audit doesn’t have to be scary. In fact, it can be a healthy process to learn where your non-profit can improve over time.

And enlisting the help of external audit services can be a great way to take an objective look at your non-profit. You’ve put your whole heart and soul into helping those who can’t help themselves. Don’t risk everything by not keeping your organization running efficiently and financially responsibly.

So, if you think that an audit would be a good experience for your non-profit, then find a CPA you can trust to come and take an objective look at your company today. With the help of an experienced professional, you can ensure that your non-profit will be around for years to come to help many more people.

So, if you’re looking for help on anything from filling out your Form 990 to updating your bookkeeping, then let’s chat. We offer affordable services and can help you set up your non-profit for success today.