Regular outside financial audits are among the most effective tools for revealing financial risks in a timely manner. And they assure your donors and other stakeholders about your stability — so long as you respond to the results appropriately. Failing to act on issues identified in an audit isn’t only a waste of money. It also may threaten your organization’s long-term viability.
Before the final audit report
Once the outside auditors complete their work, they typically present a draft report to the audit committee, executive director, and senior financial staffers. Those individuals should take the time to review the draft before it’s presented to the board of directors.
The audit committee and management also should meet with the auditors prior to the board presentation. Often the auditors will provide a management letter (also called “communication with those charged with governance”), highlighting operational areas and controls that need improvement. The nonprofit team can respond to these comments, indicating ways they plan to improve the organization’s operations and controls, to be included in the final letter.
The audit committee also can use the meeting to ensure that the audit is properly comprehensive. The auditors should report to the committee about:
- The level of staff cooperation,
- Whether they received all requested documentation,
- Any other difficulties or limitations encountered during the process,
- Any significant audit plan changes that were made and the reasons for such changes, and
- Any unresolved matters.
The audit committee should determine whether there were any conflicts of interest between the auditors and the nonprofit and how they affected the scope of the audit.
Executive director’s role
The committee should obtain the executive director’s impression of the auditors and the audit process, too. Were the auditors efficient, or did they perform or require redundant work? Did they demonstrate the requisite expertise, skills and understanding? Were they disruptive to operations? The board should consider this input when deciding whether to retain the same firm for the next audit.
The audit committee and management also might want to seek feedback from the employees who worked most closely with auditors. In addition to feedback on the auditors, they may have suggestions on how to streamline the process for the next audit. For example, staff could develop a checklist of documentation the auditors requested so it can be gathered and properly formatted in advance.
After the final audit report
The final audit report will state whether your organization’s financial statements fairly present its financial position in accordance with U.S. accounting principles. The statements must be presented without any inaccuracies or “material” — meaning significant — misrepresentation.
The auditors also will identify, in a separate letter, specific concerns about material internal control issues. Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements, whether due to error or fraud. The auditors’ other suggestions, presented in the management letter, should include management’s responses.
If the auditors find your internal controls weak, your organization must promptly shore them up. You could, for instance, implement new controls, such as segregating financial duties or implementing new accounting practices or software. Such measures can reduce the odds of fraud, improve the accuracy of your financial statements and help reduce future audit costs.
Ignore at your own risk
Underresourced organizations can struggle to respond to audit findings. The potential costs, however, are too high to sit back and do nothing. Much can be gained by constructive follow-up.