Common Audit Issues Non Profits Face by NonProfitCPAs


More Info
									Common Audit Issues for Nonprofit
CFOs and How to Avoid

January 13, 2012

                            Christian Spencer, CPA
                                     (202) 419-5124

   Common issues noted
   Other issues noted
   How to avoid audit issues
   Questions/ discussion
Roll of the typical CFO……..
Common issues noted

   Inadequate Segregation of Duties
       Recordkeeping, reconciliation, and authorization of transactions
        should be performed by separate individuals
       Staffing cuts and vacant positions result in incompatible duties
        being performed
       Example # 1: Bank reconciliation procedures
          Bank reconciliation is performed by staff accountant
          Bank reconciliation reviewed by Controller
          Checks are signed by CFO
       Controller position becomes vacant
          Staff accountant prepares reconciliation and is reviewed by CFO
          Use of compensating controls becomes necessary to account for
           incompatible functions
          Provide monthly check register and bank statement to Treasurer or
           finance committee as they are independent of reconciliation and
           approval process
Common issues noted

    Example # 2: Journal entries
       Non-standard entries are prepared and posted by staff
        accountant with no documented authorization by Controller
       Recording and approving of journal entries should be
       Controller should review and approve entries prior to posting
       Compensating control - print out a list of all posted journal
        entries at month’s end. This should be reviewed and
        approved by the Controller
       Review and approval should be documented and available
        during the audit process to verify the control was in place and
        properly executed
Common issues noted

   Incomplete Documentation
       Most organizations have an accounting policies and procedures
        manual, but often times no documentation of the executed
        control exists
       Monthly close process, investigation of significant budget to
        actual variances, and approval of journal entries are common
        areas of this occurrence
       Example- controller may review all reconciliations performed by
        the accounting staff; however, no documentation exists of this
       Solution- preparer and reviewer should sign and date manual
       For less paper intensive environments- use of a monthly close
        checklist is also effective as it summarizes specific close
        procedures and provides trail of controls executed
Common issues noted

   Lease Agreements
       Application of FAS 13 (ASC 840) is still in effect until the revised
        standard on lease accounting is adopted
       The revised standard will require nearly all operating leases to
        be accounting for as capital leases. A liability for future lease
        payments and a corresponding right of use asset will be
        recorded at the inception of the lease
       Amortization of the asset and reduction of the liability will occur
        as lease payments are made
       New standard most likely still several years away from being
Common issues noted

   Lease agreements
       Current standards require rent expense be recognized straight-
        line over the life of the lease agreement
       Most leases include annual rent escalation clauses and many
        include periods of free or discounted rent
       As a result the rent paid does not equal the amount of rent
        recognized on a straight-line basis- the difference is the deferred
        rent liability
       Allowance for tenant improvements needs to be recorded as well
        as an asset and deferred tenant liability
       Tenant allowances are often missed because these are
        transactions handled by the landlord
       Gross-up of assets and liabilities can be material and can impact
        financial covenants
Common issues noted

   Contract Reviews
       Who is authorized to enter into contracts on the Organization’s
       Organization needs to ensure that contracts are reviewed for
        operational and financial implications before they are executed
       Example # 1- Director of fundraising for a museum enters into
        an agreement with a beverage company to exclusively offer only
        that company’s products in its restaurant
       During the audit the agreement is reviewed and the exclusive
        provider provision is discovered with triggers taxable unrelated
        business income
       Director of fundraising was not familiar with unrelated business
        income provisions and neither the CFO nor legal counsel were
        consulted prior to execution of the agreement
Common issues noted

   Example # 2- An organization has a policy that future sites for its
    convention are evaluated and selected by a committee of the board
    of directors. The head of the committee enters into a contract
    obligating the organization to hold its 2014 event at a hotel in Las
   Subsequent to the execution of the agreement, the CFO notes the
    large block of hotel rooms that the organization is required to fill.
    Based on past experience he knows it will be difficult to fill this large
   As a result the organization has exposed itself to a potential attrition
    penalty because the CFO was not consulted to review the contract
    prior to its execution
   Important that all significant contracts be reviewed by qualified
    individuals prior to execution
Common audit issue noted

   Evaluating significant estimates
       Allowance for doubtful accounts receivable, discounts used in
        valuation of future promises to give, reserve for nonsalable
        inventory, and discount rates used in actuarial valuations are
        common estimates
       Common issue is that estimates are not adjusted annually for
        current events or there is no systematic rationale for the estimate
       There should be a documented process for significant estimates
        that is reasonable and consistently applied
       Example # 1- allowance for doubtful accounts receivable includes
        50% of amounts past 90 days due plus an amount for any other
        items known to be uncollectible
       Example # 2- inventory is reviewed annually for slow-moving items
        and a reserve for nonsalable inventory is established for any items
        that are deemed nonsalable based upon recent sales activity
Other issues noted

   Lack of sufficient controls over corporate credit cards
      Payment of the credit card was done prior to coding of expenses
      Amounts were recorded in suspense account until properly
      Coding was not done timely and followed up by accounting
      Large suspense account had to be reconciled at year end
   Lack of internal controls over wire transfers
       Policies and procedures manual addresses cash disbursements
        but not wires
       Situations were wires were not required to be confirmed by a
        separate individual
Other issues noted

   Levels of board designated net assets that create negative
    unrestricted net assets.
       Net assets can not be designated by the board so as to create
        an unrestricted deficit
       You have essentially designated more net assets than you have

   No documented whistleblower or document destruction policy
       These are the only two provisions of the Sarbanes Oxley
        Act required to be adopted by all organizations
       Governance section of Form 990 have specific questions about
        these policies
       Still seeing organizations that don’t have these policies
Other issues noted

   Monitoring debt covenants
       Discuss nature of covenants with financial institution at time of
        loan agreement to ensure they are feasible to maintain
       Working capital or liquidity ratios may be skewed due to large
        deferred revenue balances
       Many loans require quarterly covenant calculations be submitted
        to the bank
       Management’s responsibility to monitor covenants to ensure
Other issues noted

   Internal controls and monitoring of alternative investments
       Investment in partnerships, hedge funds, and funds of funds
       Documenting your evaluation process is a key control
       Meeting with general partner or fund managers to understand
        controls in place over valuation and risk assessment
       Review funds’ financial statements and auditor’s opinion
       Be aware of gates and restrictions on ability to obtain funds
       Monitor performance
          Compare performance to benchmarks
          Review portfolio holdings on a regular basis
       Amounts reported by the investment advisor may be a month or
        two in arrears in terms of the alternative investments
       Consult directly with the fund manager to obtain most recent
How to avoid audit issues

   Establishment of solid internal control structure
   Consider using the COSO framework as a basis
       The committee of sponsoring organizations of the
        Treadway Commission (COSO) issued a landmark
        report on internal control. Internal Control—Integrated
        Framework, which is often referred to as "COSO"
        provides a sound basis for establishing internal
        control systems and determining their effectiveness
       The report outlines five essential components of an
        effective internal control system
How to avoid audit issues

   Control Environment- sets the tone of an organization by
    influencing the control consciousness of its people. The tone is
    established through the actions of management and the governing
    body. (remember actions speak louder than words!)
   Risk Assessment- involves the identification and analysis by
    management of relevant risks at the organization (financial,
    operational, political, public relations, competition)
   Control Activities- are the policies, procedures, and practices that
    ensure management objectives are achieved and risk mitigation
    strategies are carried out
   Information and Communication- communicates control
    responsibilities to employees, board members and others by
    providing timely, accurate, and relevant information
   Monitoring- are the processes that assess the quality of the
    internal control performance over time
How to avoid audit issues

   Proper segregation of duties
   Use of a monthly close checklist to facilitate complete, accurate
    and timely monthly reconciliations
   Documentation of procedures performed and controls
   Consult your audit firm as an educational resource throughout
    the year, not just at year end
   Remaining abreast of developments in the non profit sector
    through CPE, roundtables, and groups like ASAE.
   Appropriately address unusual transactions during the year,
    not at year end
   Communication- internally and externally
Speaker Biography

Christian Spencer, CPA, is a senior audit manager with over
16 years of public accounting experience, including 13 years
working exclusively with nonprofit organizations. Prior to
joining Tate & Tryon in September 2011, Mr. Spencer worked
as a director in the Vienna, VA offices of McGladrey & Pullen,
LLP where he spent 13 years providing audit and tax
services to nonprofit organizations with annual revenues
ranging from $1 million to over $300 million. Mr. Spencer’s
experience includes planning and managing the audits of a
wide range of nonprofit organizations, including associations,
charitable and educational organizations including those with
for-profit subsidiaries and political action committees.
Mr. Spencer sits on the audit committee of a large 501(c)(3) Washington, D.C.-
based not-for-profit organization that focuses on providing food and shelter
services to individuals in need. In addition, he is a member of the Finance and
Business Operations Section Council of the American Society of Association
Executives. He participates in ongoing continuing education courses for not-for-
profit accounting and has written articles for various publications.

To top