Get the Most Value from Your Audit

Audits are expensive in terms of money, staff time, and board attention.

CPA Dennis Walsh tells us how to wring the most value from them:

An IRS tax audit has been described as an autopsy without the benefit of death. The financial statement audit — done by an independent CPA, not the IRS — can be seen by nonprofits as only slightly more appealing.

Many nonprofits have annual CPA audits, but the executive director and/or the board’s finance or audit committee may be unsure whether they are getting the most out of the audit. A worthwhile question for the board to ask might be: “Are we getting the most out of this significant investment of money and time?”

We have developed two questionnaires to help you answer this question. The first looks at whether your auditor is doing a good job for you. The second questionnaire looks at whether your nonprofit is doing its part in utilizing the audit. (The questionnaires can also be downloaded as a Word document; see link at end of article.)

But first, why have an audit, anyway?

Benefits of a good audit relationship

An unqualified audit opinion — a “clean audit” — is a statement by the auditor that the financial statements are a fair and accurate representation of your organization’s financial situation. As Jeanne Bell of CompassPoint Nonprofit Services pointed out in a Blue Avocado article, an audit can have the following major benefits:

• Enhances donor and community confidence
• Demonstrates commitment to fiscal accountability
• Moves the nonprofit toward best financial practices (through auditor feedback)
• Encourages accounting discipline
• Provides limited deterrent to fraud

The better the relationship with your audit firm, as expressed by the following indicators of a good audit relationship, the more of these benefits you can expect to realize:

• Trust
• Independence
• Communication
• Competence
• Timeliness
• Value

These two questionnaires are tools to help you sample for the presence of these qualities. It is not a checklist for a clean audit report or intended to assign blame for shortcomings, but rather looks for qualities inherent in a well-functioning audit relationship.

It’s important that you be willing to invest some time finding out what’s at the core of any “no” answers.

Is our auditor doing a good job for us?

Question	Yes	No	Don’t know
Does audit planning begin well in advance of fiscal year-end?
Does the auditor prepare an audit engagement letter that is discussed in advance of the audit?
Are changes in the audit fee (from the prior year) adequately explained in advance?
Has the auditor informed you of any audit-related tasks that can be performed by your staff or outsourced at lower, non-audit rate?
Does the auditor give your staff enough time and adequate instruction to gather and prepare documents, where permissible, to assist in audit field work?
Is audit field work conducted without frequent interruptions and delays?
Does the auditor make it clear through words and behaviors that the client is the board, not the staff?
Is the audit firm sensitive to timely completion of IRS Form 990, grantor reports, and government agency filings prepared in conjunction with the audit?
Does the auditor demonstrate proficiency with nonprofit issues such as accounting for pledges and multi-year grants, donated goods, recognition of qualifying volunteer services, classification of restricted donations, etc.?
Does the auditor explain the reasons for any proposed adjustments to the financial statements and anything you should do differently in the future related to those adjustments?
Does the auditor give you the chance (and the time) to respond to the draft audit, footnotes, and management letter?
Has the auditor been willing to consider changes in above based on a discussion?
If the auditor makes changes to your preferred financial statement format (such as the level of detail on the balance sheet, horizontal or vertical presentation, and so forth), have you discussed the changes in advance?
Does the auditor meet with the board (or a board committee) without staff present?
Is the audit report issued by the date specified in the audit engagement letter?
Does the auditor press for implementation of solutions to recurring accounting and internal control deficiencies?
Is there low or moderate turnover in the audit team from year to year?
If an audit is not mandated by one of your funders, has the audit partner indicated a willingness to explain to the board from time to time whether a different type of service such as a review – might accomplish your governance and accountability needs?
As your organization has changed, do you feel the planning and conduct of your audit has kept up with the changes? (examples: different activities, larger staff, smaller staff, changes in funding sources)

Are we doing a good job managing our audit?

Question	Yes	No	Don’t know
Does the board (as opposed to management staff) lead the decision in choosing an auditor?
Do senior staff (as opposed to the auditor) make all decisions on accounting methods, such as basis of accounting, depreciation methods, asset useful life, when to reclassify restricted grants, when to recognize pledges, and so forth?
Do one or more board members understand the reasons for the choices made above?
Does the board (or a board committee) meet annually with the auditor without staff present?
Is the substance of that meeting reported to the full board?
Are we satisfied that neither we nor the auditor is becoming complacent with the relationship?
Does the staff exhibit a proper distance from the auditor (as opposed to a complacent relationship)?
In addition to evaluating audit expense, has the board (or a board committee) considered the size, nonprofit audit experience, and other credentials of the audit firm?
Are copies of the audit and the management letter given to all members of the board?
Does the board review the audit relationship every three years, or more often if there are any problems?
Has the staff responded appropriately to comments in the management letter?
Not part of the audit but related: Does senior staff other than finance staff review the draft 990 before it is finalized (in particular to look at areas such as Program Accomplishments)?

Reluctance to change auditors

Whatever their past audit experience, however, organizations are often reluctant to tamper with what feels like a successful service relationship. After all, if it isn’t broken, why fix it?

A common attitude among small organizations in particular is that although we get written up for accounting deficiencies, we still receive an unqualified audit opinion from year to year. But an unqualified opinion along with what seems like a good relationship with the auditors doesn’t guarantee that the organization is getting what it is paying for in the audit experience.

Assessing your answers

The greater the number of “no” answers, the more the board should address audit matters with priority. Consult with your CPA audit principal to determine underlying reasons for “no” answers and develop an action plan to remedy the issues, with consideration to any contributing factors from the organization as well as what the audit firm can do to help spur you on to better practices.

Identifying causes of perceived complacency in the audit relationship can be much thornier. Since the audit depends on a cooperative partnership among the board, staff, and audit team, there is usually some degree of shared responsibility where expectations aren’t met. Here in particular, board and management must resist the temptation to point fingers and remember that the board, not the audit firm, is ultimately responsible for the quality of the audit relationship.

Bear in mind that recurring deficiencies due to structural issues such as unwillingness to invest in accounting systems, training, or staffing, for example, will take more time and resources to remedy than adjusting the timing of audit field work to lessen disruptions to your activities.

Tip: If your organization’s staff struggle to prepare GAAP financial statements prior to the audit, consider having the statements initially prepared (compilation engagement) by a second CPA firm at a lower, non-audit billing rate. This can also enhance audit firm independence, reduce overall cost, and help avoid the common management letter comment regarding inadequate accounting personnel.

If you decide that issues with the current audit firm can’t be worked out, then it’s time to look for a successor. But be careful, deliberative, and if you must, part with your current auditors gracefully. (And watch for an upcoming Blue Avocado article on finding a new auditor.)

Concluding thought

Although some nonprofits dread the annual audit as something to be endured, the audit is an exercise in good governance and accountability. In practical terms, this means that the financial statements are judged to portray the organization’s financial condition fairly and completely. And valuable management advice is a natural by-product of a good audit relationship. You consume considerable resources being accountable to your stakeholders: get the most from it.

Thanks to Dane Byers, CPA, of Bassett & Associates, PA, in Raleigh, NC, and Steve Zimmerman, CPA, of Spectrum Nonprofit Services in Milwaukee, WI, for their feedback in the development of this article.

See also in Blue Avocado:

• Is It Time for an Audit? by Jeanne Bell

• Seven Ways to Reduce Your Audit Costs by Dennis Walsh

You might also like:

• Treasurers of All-Volunteer Organizations: Eight Key Responsibilities
• An Easy-to-Use Accounting Procedures Manual Template
• A Guide for Private Foundations: Tax Exemption and 990-PF Filing Requirements
• Why is it Hard to Give My Money Away? A Donor’s Perspective
• Nonprofit Grant Proposal Budget Calculations: A Road Map

 

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