Nonprofits: Act Thoroughly On Audit Findings

An external audit is a powerful tool for nonprofits, ensuring that financial statements are accurate and comply with U.S. Generally Accepted Accounting Principles (GAAP). Beyond bolstering stakeholder trust, they can help detect and prevent occupational fraud. However, to truly benefit, your organization must act on the recommendations provided. Ignoring these insights could endanger your nonprofit’s stability and future.

Understanding the Audit Report

Once auditors complete their examination, they typically present a draft report to key figures in your nonprofit, such as the audit committee, executive director, and senior financial staff. It’s essential that these individuals thoroughly review the draft before it goes to the full board of directors.

Before presenting to the board, your audit committee and management should meet with the auditors. This meeting is crucial for several reasons:

1. Management Letter Review: Auditors often include a management letter that highlights areas needing improvement. Your team should discuss how the organization plans to address these areas, which will be documented in the final management letter.

2. Comprehensive Audit Assurance: The audit committee must ensure the audit was thorough. Auditors provide a governance letter confirming staff cooperation and listing any challenges faced during the audit, such as difficulties in obtaining documents or required accounting adjustments. This letter also notes any significant changes to the audit plan and their justifications.

3. Conflict of Interest Evaluation: The audit committee should identify any potential conflicts of interest between the auditors and your staff that could have influenced the audit’s scope or findings.

Implementing the Findings

The final audit report will confirm whether your financial statements are fairly presented according to GAAP, free from material misstatements or inaccuracies. However, the audit’s true value lies in the accompanying management letter, which may identify weaknesses in your internal controls.

Strong internal controls are vital for safeguarding against errors and fraud. If auditors identify control weaknesses, your organization must take immediate action to strengthen these areas. This might include:

• Segregating Financial Duties: Distributing financial responsibilities among different staff members to reduce the risk of errors or fraud.
• Updating Accounting Practices: Implementing new accounting practices or software to improve accuracy and efficiency.
• Training Staff: Ensuring that all employees understand and follow updated financial procedures and controls.

Maximizing Benefits

A report is only as effective as the actions taken in response to its findings. To fully benefit from the insights provided by an external audit, your nonprofit must be proactive in addressing identified issues. This commitment to continuous improvement will enhance financial integrity and stakeholder confidence, ultimately supporting your organization’s mission.

For assistance in implementing new internal controls or addressing other audit-related issues, contact us. Our expertise can help ensure your nonprofit remains robust and resilient.