The law does not require non-profit organizations to conduct an annual financial audit unlike public companies, as these organizations are based on accountability rather than profit. Therefore, they do not need to prove the integrity of their financial resources to shareholders and government entities.

However, there are many reasons that may drive non-profit organizations to take this step, which is often adhered to by large organizations that receive external donations and grants on a regular basis.

  1. Benefits of financial auditing for non-profit organizations:
  • This process contributes to establishing transparency, as it provides evidence that assures current and potential donors that the funds provided are being used correctly, in line with the amount of donations and the mission of the organization.
  • Auditing usually results in changes at the level of methods or systems in the non-profit organization.
  • It helps auditors detect errors in records (if any), thus organizations will seek to avoid this mistake by providing guidance to the management team on how to correct it.
  • An audit document can significantly help in attracting major donors, who often ask to see the financial statements of non-profit organizations before making their contributions.
  • Sound audits help secure bank loans; conversely, poor audits can cost you a lot of money.
  1. Concerns of auditors:

Understanding what worries auditors is the first step in preparing for the audit process, as experienced auditors in this field categorize risks into three groups:

  • Inherent risk: This risk is a type of risk inherent in your organization, which depends on the size of the organization, its degree of complexity, and even the categories it targets. For example, non-profit organizations are automatically susceptible to the risk of financial errors, incomplete data, and fraud, simply due to the large number of employees involved in auditing matters. However, the organization can face many of these risks by creating a strong internal control system.
  • Control risk: Regardless of the severity of the inherent risks, not having appropriate controls and systems for managing funds during the auditing process and others will expose it to additional risks. For example, the tasks of collecting donations, depositing funds, and recording and tracking them should not be entrusted to the same person.
  • Detection risk: The likelihood of the auditor overlooking an important piece of information increases if either of the two types of previously mentioned risks is strong.
  1. Ideas to help the organization conduct a sound audit:
  • Create many controls and assurances related to donations and how they are directed: This can be done by separating tasks as a first step and ensuring that many parties are involved in the donation collection, depositing, and distributing processes inside and outside the organization.
  • Evaluate the organization's accounting and financial systems:

If you are currently using spreadsheets only to track this money, it may be time to invest in virtual systems that do not require installation or maintenance.

  • Hire an accountant experienced in non-profit organizations:

Fund accounting can be a heavy task even for an experienced accountant. Compared to the records of assets and liabilities in for-profit organizations, each fund in a non-profit organization represents a mini institution in itself.

  • Support auditors:

Evading audits is often a natural reaction against someone seeking to uncover violations. However, it is better not to disrupt the process and to assist auditors as much as possible in doing their jobs, as this will ultimately help you be more effective in your case and contribute to the growth of your organization.

  • Conduct audits annually:

This helps create a regular pattern for reports and prepared standards, and transparency that is highly appreciated by donors.

  • Incorporate technology into internal controls:

Given the use of networks and technological programs to process a lot of information, it is important to ensure that your systems and bank partners comply with the rules and operate within them. If your organization does not use accounting software, conduct manual checks of spreadsheets, and always ensure that you keep documents and records that document financial transactions.

In general, the board of directors of a non-profit organization should make the decision to conduct a financial audit. Even if non-profit organizations do not have the same budget and resources required to conduct audits like companies do, this does not mean that audits are a waste of time. Regular audits for non-profit organizations that feature a certain size and level of complexity can help ensure their stability and long-term credibility.

Source: NP Tech News

Author: Alex Acry