Has your nonprofit had an outside audit recently? If so, did your organization act on the findings? The cost of not responding to audit results can be steep. Read on to learn why constructive follow-up is in your organization’s best interest.
Reviewing the draft report
Once outside auditors complete their work, they typically present a draft report to the subject’s 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.
Your audit committee and management should meet with auditors prior to their board presentation. Often auditors will provide a management letter highlighting operational areas and controls that need improvement. Your team can respond to these comments, explaining how your organization plans to improve operations and controls, to be included in the final letter.
Your audit committee also can use the meeting to ensure that the audit is properly comprehensive. The auditors will provide a governance letter (also called “communication with those charged with governance”), which should confirm cooperation from your organization’s staff and whether they received all requested documentation. They’ll also disclose any difficulties or limitations encountered during the process, accounting adjustments required, and any significant audit plan changes and the reasons for such changes. Finally, they’ll report if there are any unresolved matters. Your audit committee should determine whether there were any conflicts of interest between the auditors and your team and how they might have affected the scope of the audit.
Considering input from others
The committee should obtain your executive director’s impression of the auditors and the audit process, too. Did the auditors 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.
Your 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, your staff could develop a checklist of documentation the auditors requested so it can be gathered and properly formatted in advance.
Taking next steps
The final audit report will state whether your organization’s financial statements are fairly presented in accordance with U.S. Generally Accepted Accounting Principles. The statements must be presented without any material — meaning significant — inaccuracies or misrepresentation.
As noted above, the auditors also may 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.
If the auditors find an organization’s internal controls weak, the organization must promptly shore them up.
If the auditors find your internal controls weak, your organization must promptly shore them up. You could, for instance, set up 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.
Don’t waste your money
Regular outside financial audits can provide assurance to your donors and other stakeholders about your nonprofit’s stability, while also revealing financial risks. The key is to respond to the results. 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.