Nonprofit organizations are as unique as their for-profit counterparts and while they have key organizational differences, auditors have noticed three common issues when performing nonprofit audits: insufficient staffing, weak internal communications and insufficient application of internal controls. These issues not only affect the reliability of the financial information provided by the organization, but they also create an environment for potential fraudulent activity. Consider the following issues that arise out of nonprofit audits and how nonprofits can prevent these issues:
Insufficient Staffing
An accounting department that is insufficiently staffed could mean that the financial information reported by the nonprofit is unreliable. As nonprofits continue to cut costs, individual employees are taking on too many roles, resulting in more reporting and data-entry errors. Because employees may not have the necessary time needed to complete a task carefully, errors may be over-looked or require many time-consuming corrections.
Insufficient staffing can also put an organization at risk for internal fraud. The limited number of accounting staff requires individuals to take on multiple roles within the organization, leading to an improper segregation of duties. The proper segregation of duties is a key in fraud prevention. The authorization of transactions, custody of assets and record-keeping functions must be separated in order to ensure that fraudulent activity does not occur.
Nonprofit organizations need to analyze their individual situations regarding the lack of staffing in their accounting departments. If the accounting staff is burdened by their responsibilities, it may be necessary to hire an additional employee (or two) to take on some of the responsibility. If an organization is short on funds, part-time help may also be considered to alleviate the burden on the accounting staff.
Weak Internal Communications
Weak or insufficient internal communications can damage an organization’s reliability, especially when the accounting department fails to receive updates on individual transactions. Communication breakdowns within an organization can increase the potential for unaccounted for transactions and non-compliance with government regulations.
Communication breakdowns can also affect an organization’s standing with granters. If the accounting staff is not aware of specific grant restrictions and requirements, the nonprofit may jeopardize its ability to obtain grants. If the organization is closely scrutinized by regulatory agencies and its financial records are found to be deficient, future grants may be at risk. Ensure that your organization remains in good standing with your granters by implementing strong internal communications within your organization.
Nonprofits with weak internal communications have an increased potential for fraudulent activity. If the accounting department is not informed of an organization’s various activities, questionable transactions may not be identified.
Nonprofits can overcome the risks associated with poor communication by ensuring that the accounting department receives copies of every contract and agreement, is notified of all oral transactions and is informed about the circumstance of all transactions. Nonprofits can also improve communication efforts by setting up frequent meetings between key accounting personnel, management and their auditors to ensure that everyone is on the same page regarding the organization’s activities.
Insufficient Internal Controls
An organization’s internal controls represent the policies and procedures established to ensure that management directives are carried out. When those policies and procedures are overridden or ignored, internal control problems result. Inadequate policies and procedures can also result in potential financial problems that may not be identified until the audit. In order to prevent any potential financial problems, nonprofits need to conduct reviews of budgets, forecasts and prior periods on a regular basis.
Nonprofit organizations need to examine their internal control structure in order to identify weaknesses and financial overseers should verify the financial information reported to them on a regular basis. As auditors discover weaknesses in an organization’s internal controls, they should focus on expanding audit testing in order to compensate for the lack of controls and offer the organization suggestions for improvement.
As auditors and nonprofits work together, they can reduce the risk of these issues and ensure that organizations are prepared for an upcoming audit. For more information about preparing your organization for an audit, click here.