Be Prepared for an Audit: Avoid These 4 Mistakes

June to-do lists of most nonprofits are always focused on the financial preparations for the upcoming fiscal year. Yet, many still remain unprepared for the possibility of a future audit. To prevent being blindsided in the future, it would be beneficial for nonprofits to move some of their attention from this fiscal year to re-evaluating their organization’s workflow and infrastructure.

I’ve spent the past two decades working with nonprofits. Many of these organizations, regardless of size, continue to make the same mistakes year after year. They are continuously unprepared for a future audit, because they hire the same types of workers, creating deeply engrained legacy problems.

The decisions at the start of a nonprofit’s life cycle are always focused around minimizing expenses. Their staff is made up of volunteers and well-intentioned professionals with limited bookkeeping experience. But even as these organizations mature, they stick with their initial hiring habits. Thus, many problems go unfixed.

Due to these legacy problems, nonprofits continuously neglect their workflow and infrastructure. This causes them to be unprepared for audits. Here are some of the most common mistakes I’ve seen nonprofits fall into the cycle of making:

1. They have no system in place for tracking restricted grants, gifts and donations.

Grants, gifts and donations that are categorized as restricted are given to the organization with a contingency placed by the donor. Nonprofits are only able to use the money if they can prove the funds are used as restricted by the donor. Though this is common practice for donations, many nonprofits do not have a system for tracking the restricted money. Heading into the coming fiscal year is a good time for nonprofits to establish a system to prove the money was spent as required by the donor.

2. Their archives are only in hard copy.

Searching for a single page of expenses from September 2016 can either go one of two ways: A single click of a computer’s search tab or a single day of searching through filing cabinets in a backroom closet. Many nonprofits refuse to acknowledge the ease of the digital age and decide to wastefully spend that single day going through piles of dusty folders. This unnecessarily frustrates and wastes the time of nonprofit finance teams. It would pay for organizations to work a digital archival system into this year’s budget in order to save time and be better prepared for any future audit.

3. They don’t discuss cash flow performance on a regular basis.

Most nonprofits don’t check up on the status of their cash flow performance and instead, just assume it matches forecasted expectations. But when they are not performing as well as they hoped, they often take too long to notify financial advisors. The financial problem only escalates the longer it goes unaddressed, which hurts any audit. To prevent an uncatchable financial hole, nonprofits should mark their calendars for the next fiscal year with monthly calls to financial advisors and bookkeepers.

4. They do not properly report pledges.

Pledges from donors are supposed to be accounted for as “Receivables and Income.” Many nonprofits incorrectly categorize them as cash and income as they are received, creating inaccuracies in their books. The incorrect reporting results in income being accounted for in the wrong periods and assets for the year being incorrectly stated. To run more accurate financial reports, nonprofits should make sure to correctly report pledges.