Financial statements and the audit process may not be for the fainthearted
For many volunteer directors of not-for-profit entities, the financial statement and audit process can be a looming mystery and an intimidating responsibility. While the finer points of accounting and financial reporting do require a certain degree of expertise, a few simple tricks can help you better navigate the process. Here are our top six best practices for board and audit committee members — so you can leave the technical nuances to the organization's management and the accounting experts.
- Understand your role (and the roles of others): Don’t get bogged down by the details! Your role as a director or audit committee member is to supervise the financial statement and audit process. So who should prepare for the audit by producing accurate, well-organized, and timely accounting records and reports? Your management team. Hold management accountable for the organization’s financial goals, and ask for your auditor’s feedback on how the management team is doing and how the organization could improve.
- Position your board and audit committee to guide the organization: To best leverage the existing expertise of your board members, you must understand their strengths and fashion an audit committee to take advantage of them. While some directors may have financial or legal expertise (CPAs, CGMAs, attorneys, CFPs/CFAs, CIC/CIAs), others may have strengths in leading productive meetings and coordinating or delegating committee tasks. Ask qualified directors to serve on specific committees, and if you’re still missing critical expertise, seek out new candidates to fill those gaps—even in a non-voting capacity. The nominating committee will thank you the next time a board seat comes available.
- Pick the right CPA firm partner: It's vital to select a high-quality auditor with extensive experience in auditing nonprofit organizations. Keep in mind, the cost of an audit is more than just the fee incurred. Consider the cost of your staff’s time, energy, and stress in working with the firm and its team, and don’t forget to consider the potential reputational cost of a bad audit. A scandal or financial fraud would immediately affect your organization in multiple ways – including curbing your fundraising opportunities and ultimately negatively impacting your mission. A good CPA firm will work with your board and management team to build a high level of trust and give advice about how to optimize the organization’s finances.
- Prepare for the initial meeting: You’ll likely meet with your auditor only a few times annually, so use this time effectively. A good auditor acts as a partner and should send you a pre-audit letter (or schedule a pre-audit meeting) so you’re fully prepared for every meeting. Be sure you’ve reviewed the letter before the meeting so you're ready to ask questions about the sections that need further clarification.
- Keep communicating with your auditor: Don’t stop the flow of communication after the initial meeting, and don’t wait for the audit completion meeting – if questions or concerns arise at any point in the process, contact your auditor immediately. As a director, you're the expert on your organization and will need to educate your auditors and inform them of changes and circumstances they might not be aware of. Likewise, most directors won’t understand complex accounting, and your auditor won’t expect that. The audit committee and auditor should be regularly communicating with each other to be successful.
- Review the audit results and ask good questions: After the audit is completed, invite your auditor to present their work and provide additional detail. The timing of this meeting may vary depending on whether the board or audit committee accepts the draft audit opinion and financial statements provided by the auditor. Review the reports ahead of time so you can actively participate in the meeting. Your organization’s management team should also be present. The CFO or finance director is likely in the best position to answer questions related to the organization’s specific financial results, how those results were verified and audited to the CPAs, and the specifics of the risk assessments in the financial statements. You should also ask your partner CPA firm to identify areas for improvement they noticed during their work. Last but not least, invite the auditor into executive session with the board of directors only, excusing management and other guests, and ask the auditor whether he or she has anything else to report.
Reviewing financial statements and undergoing the audit process don't have to be intimating or overwhelming. Manage the process and leverage the experts, and you're likely to gain new insights you can apply to your organization's ongoing success.