Category Archives: Auditing

What to do when the audit ends

Erin MiranteOctober 14, 20200 Comment

Financial audits conducted by outside experts are among the most effective tools for revealing risks in not-for-profits. They help assure donors and other stakeholders about your stability — so long as you respond to the results appropriately. In fact, failing to act on issues identified in an audit could threaten your organization’s long-term viability.

Working with the draft

Once outside auditors complete their work, they typically present a draft report to an organization’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 organization’s audit committee and management also should meet with the auditors prior to the board presentation. Often auditors will provide a management letter (also called “communication with those charged with governance”), highlighting operational areas and controls that need improvement. Your nonprofit’s team can respond to these comments, indicating ways they plan to improve the organization’s operations and controls, to be included in the final letter. The audit committee also can use the meeting to ensure the audit is properly comprehensive.

Executive director’s role

One important audit committee task is to obtain your executive director’s impression of the auditors and audit process. Were the auditors efficient, or did they perform or require redundant work? Did they demonstrate the requisite expertise, skills and understanding? Were they disruptive to operations? Consider this input when deciding whether to retain the same firm for the next audit.

The committee also might want to seek feedback from 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.

No material misrepresentation

The final audit report will state whether your organization’s financial statements present its financial position in accordance with U.S. accounting principles. The statements must be presented without any inaccuracies or “material” — meaning significant — misrepresentation.

The auditors also will 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. The auditors’ other suggestions, presented in the management letter, should include your organization’s responses.

If the auditors find your internal controls weak, promptly shore them up. You could, for example, implement new controls or new accounting practices.

How to convince donors to remove “restricted” from their gifts

Erin MiranteFebruary 27, 20190 Comment

Restricted gifts — or donations with conditions attached — can be difficult for not-for-profits to manage. Unlike unrestricted gifts, these donations can’t be poured into your general operating fund and be used where they’re most needed. Instead, restricted gifts generally are designated to fund a specific program or initiative, such as a building or scholarship fund.

It’s not only unethical, but dangerous, not to comply with a donor’s restrictions. If donors learn you’ve ignored their wishes, they can demand the money back and sue your organization. And your reputation will almost certainly take a hit. Rather than take that risk, try to encourage your donors to give with no strings attached.

Personal touch

Some donors simply don’t realize how restricted gifts can prevent their favorite charity from achieving its objectives. So when speaking with potential donors about their giving plans, praise the benefits of unrestricted gifts. Explain how donations are used at your organization, offering hard numbers and examples where needed. Be as upfront as possible and give them as much information as you can about your organization.

To make unrestricted giving as easy as possible, give donors (and their advisors) sample bequest clauses that refer to the general mission and purpose of your organization. Also encourage them to include wording that shows “suggestions” or “preferences” for their donations, as opposed to binding restrictions. Prepare documents that give wording samples for these cases.

Words of intent

Unless you’re holding a fundraiser to benefit a specific program, include general giving statements in your fundraising materials. For example, you might say: “All gifts will be used to further the organization’s general charitable purposes,” or “Your donations to this year’s fundraiser will be used toward the continued goal of fulfilling our organization’s mission.”

Reinforce this message in your donor thank-you letters. They should state your nonprofit’s understanding of how the gift is intended to be used. For example, if a donor stipulated no restrictions, explain that the money will be used for general operating purposes.

Gentle persuasion

Obviously, you’ll need to be respectful if a donor is determined to attach strings to a gift. (Before accepting it, just make certain you’ll be able to carry out the donor’s wishes.) But if you can persuade contributors that their gifts will be used in a responsible and mission-enhancing way, many are likely to remove restrictions.

Charitable Solicitation License Refresher

Pam WilliamsAugust 4, 20170 Comment

By Rebecca Lunn

In the nonprofit arena, charitable solicitation licenses are a necessity for certain fundraising efforts. If you are an organization or individual that asks the public for contributions or donations to support a charitable purpose, a charitable solicitation license (“CSL”) is needed, unless specifically exempt by law. As many states have laws regulating the solicitation of funds for charitable purposes, it is important to check the requirements for each state your organization operates in to ensure compliance.

For organizations based in North Carolina whom are currently registered with the NC Secretary of State (SoS) Charities Bureau, keep in mind the following renewal requirements:

· The NC SoS notifies by mail all organizations who already hold licenses 65 days prior to their annual renewal date of the renewal requirements. Typically, each organization files its own CSL renewal directly with the NC SoS.

· The NC SoS has published on its website that all organizations who have a current CSL should disclose its licensure status, such as including a statement with the following wording on all solicitations: “Financial information about this organization and a copy of its license are available from the State Solicitation Licensing Branch at 919-807-2214 or 888-830-4989 for NC Residents.”

· Licenses are generally due 4 ½ months following the fiscal year-end date of the organization; however, all organizations in “current” standing with the NC SoS receive a 60-day extension without having to request it. For example, a calendar year organization in current standing has a CSL renewal due date of July 15^th in reliance on the automatic 60-day extension. Absent current standing status, an organization will be subject to late filing penalties upon its eventual updating of its record with the NC SoS.

· If more time is needed to file the CSL renewal, an additional 30-day extension is available to the organization by filing a copy of the Federal Form 8868 (extension for IRS Form 990) prior to the expiration of the automatic 60-day extension. As a result, a calendar-year organization may, by timely-filed request, extend the period of time for CSL renewal to August 15^th.

· When the CSL renewal is actually prepared, organizations must comply with the annual financial disclosure requirements via submission of one of the following: (1) a copy of the duly executed Form 990, (2) copy of the Audited Financial Statements, or (3) completing a NC SoS “Annual Financial Report” signed by 3 members of the organization’s board of directors, finance committee or audit committee.

If you are an organization who needs assistance or has additional questions on the Charitable Solicitation License requirements or renewal process, our accounting professionals at Langdon & Company would be glad to assist. Please contact us at 919-662-1001 for further information.

Also, for further information specific to the North Carolina filing requirements, please visit https://www.sosnc.gov/csl/ThePage.aspx.

Rebecca [email protected] is an Audit Senior who works primarily with non-profit organizations.

What Can We Do For You?

Pam WilliamsApril 24, 20170 Comment

By Lee Byrd

Small business owners and nonprofit executives often wear many hats while managing their organization. Whether it’s day-to-day accounting or oversight of an internal accounting department, an accounting firm offers many services that will allow you to focus on the core strategies of your business. Here at Langdon & Company LLP, we offer a wide range of services from basic bookkeeping to acting in a CFO role to financial statement audits and tax return preparation. Often times you will find that the cost of hiring an accounting firm to perform these services is less than hiring an employee.

Bookkeeping Services

Many small organizations do not have the need or financial resources to hire a full-time employee to perform the day-to-day bookkeeping tasks. In such ca service ses, it may be helpful to seek the aid of an accounting firm that can provide services such as accounts payable and receivable, billing, payroll, bank reconciliations, general ledger entries and monthly financial reports. You will gain the knowledge of an experienced bookkeeper with access to CPAs within the firm at a cost effective rate.

CFO Services

Do you need the expertise of a Chief Financial Officer but can’t bear to add such a salary to your already tight budget? A CPA firm can offer the expertise of a CFO in tasks such as creating budgets, preparing financial statements, analysis of financial data, or review of your organization’s internal accounting personnel offering a greater segregation of duties. These services can be provided on a periodic basis, such as monthly or quarterly, or on a project by project basis, as needed throughout the year.

Audit and Attest Services

Whether it is at the request of a lender or required by the organization’s by-laws, many organizations feel the need for a higher level of review of the financial statements. CPA firms offer attest services that will provide the level of assurance needed. An Audit provides the highest level of assurance that the fina audit ncial statements are free from material misstatement and includes the auditor obtaining an understanding of the client’s internal controls and assessing fraud risks. An audit is also the most costly level of attest service. While less costly, a Review is substantially narrower in scope than an audit and provides only limited assurance. A review consists mostly of inquiry and analytical procedures. If the audit or review services do not meet the needs of the organization, CPA firms also offer Agreed Upon Procedure (AUP) services. An AUP is an engagement in which an auditor is engaged to carry out procedures of an audit nature to which the auditor, the client, and any appropriate third party have agreed and to report on factual findings.

Tax and Consulting

In addition to day-to-day booking or more extensive oversight services, accounting firms also advise clients on financial strategies, such as lowering tax burdens, providing suggestions on a business plan, or suggestions on the most effective way to comply with third party regulations. CPAs can also assist with the preparation of state and federal tax returns.

Langdon & Company LLP is a full-service CPA firm committed to providing quality customer service in the highest professional manner. Contact us to see how we can help you!

Lee ([email protected]) is an Audit Manager with Langdon & Company LLP. She works with many not-for-profit and healthcare organizations.

Nonprofits: Choosing or Changing the Fiscal Year-End

Pam WilliamsNovember 8, 20160 Comment

by Lee Byrd

What is a fiscal year? A fiscal year is the period used for calculating annual (“yearly”) financial statements in businesses and other organizations. Many nonprofits have a fiscal year-end of June 30^th. However, this is not a requirement and the organization’s fiscal year can end whenever the nonprofit should chose, as long as the end date is specified in the organizational documents.

So how should a nonprofit chose the best fiscal year-end for the organization? Some things to consider include:

Program year – the organization’s fiscal year should coincide with its program year so that one year’s program activities should not fall into two fiscal years. For example, if the majority of the nonprofit’s programs fall during the summer months, June 30^th is most likely not the best option for that nonprofit’s fiscal year-end.
Grant cycles – Some organizations may find it helpful to align their fiscal year-end with the terms of the organization’s major grants and/or funders. This enables the organization to develop a clean cut-off for grant reporting and simplifies the grants process.
Audit evidence – Nonprofits who require an audit generally need time subsequent to year-end to close out the books and gather audit evidence in preparation for the audit. Having a year-end that falls during the organization’s busiest time of year may impact the availability and timeliness of sufficient audit evidence.
Debt covenants – For organizations with significant debt covenants, the cyclical nature of the organization’s operations and the impact on the calculation of those covenants should be considered when choosing a year-end.

Once the above factors have been considered and a year-end has been chosen, many nonprofits question the audit and reporting impact of a fiscal year-end change. A year-end change will affect how the nonprofit presents its audited financial statements in the year of change and in the subsequent fiscal year. An organization can chose to extend the period under audit in the year of change or undergo an audit for the short period, plus the original fiscal year. For this reason, it is often common for single year financial statements to be presented rather than comparative statements in the year of change. The need for a comparative financial statement presentation and the costs of an extended or additional audit period should be considered in the year of change.

Lastly, in order to change the organization’s year-end with the IRS, Form 1128 “Application to Adopt, Change, or Retain a Tax Year” will need to be filed along with Form 990 for the short period to bridge the gap between the original year-end and the new year-end. A copy of the nonprofit’s tax exempt ruling letter from the IRS will need to be submitted with along with Form 1128. If an extension is needed for the short-period Form 990, the extension must be filed prior to the initial due date of the new fiscal year. Additionally, the nonprofit will want to review and amend any organizational documents (such as bylaws) that refer to the fiscal year-end.

If you are considering a change to your nonprofit’s year-end, contact Landon & Company LLP for further guidance on your specific situation.

Lee ([email protected]) is an Audit Manager with Langdon & Company LLP. She works with many healthcare nonprofit organizations.

IT Controls: How to Keep Your Organization Safe

Pam WilliamsJuly 26, 20160 Comment

by Rebecca Lunn

As organizations become more and more reliant on technology, the risks around technology also continue to grow. Recently, we have heard on the news of large hospitals being attacked with ransomware, which encrypts files. Hackers then refuse to give the key to unlock the files unless a ransom is paid, typically in the form of bitcoin, which is more difficult to trace. Although these particular hackers were after sensitive patient data, other types of organizations should also be aware of this risk. For example, non-profits who have large databases of member or donor data may also appeal to these types of hackers. In the face of increasing risk, it is vital that organizations re-evaluate their IT controls. Strong IT controls consist of the following:

The Organization has an IT strategic planning and risk management process in place to support financial reporting requirements.
The Organization maintains reliable systems that include appropriate data backup and recovery processes. This includes not only backing up data, but testing the backup restoration process on a periodic basis.
Physical security and access to programs and data are appropriately controlled to prevent unauthorized use, modifications, damage or loss of data.
Program and system changes are appropriately managed to ensure that the application software adequately supports financial reporting objectives.

If your organization would like additional information about implementing or improving IT controls, please contact Langdon & Company LLP.

Rebecca [email protected] is an Audit Senior who works primarily with non-profit organizations.

FASB Update

Pam WilliamsMay 6, 20160 Comment

by Josh Bryant

Throughout the calendar year, the Financial Accounting Standards Board, or FASB, meets in order to deliberate on proposed standards and amendments. On March 30, 2016, the authoritative board redeliberated on Topics 954 and 958- of which relate to the presentation of Financial Statements of Not-for-Profit Entities. These pronouncements affect entities that are required to evaluate whether they should consolidate certain legal entities either using the variable interest entity, or the voting interest entity model for consolidation of limited partnerships and similar legal entities.

The discussion was primarily focused on the effective date and the transition method utilized for any not-for-profit or health care entity for which the standard applies.

Effective Date

The Board has decided that the amendments will take affect for financial statements relating to fiscal years beginning after December 15, 2017, and for interim statements following December 15, 2017.

Transition Method

“The Board has decided that not-for-profit entities, or NFPs, should apply the amendments on a retrospective basis for all years presented in the financial statements.” The Board also made concessions for NFPs during this transitional stage to enable the organization to do so cost effectively. The following two items are optional for any organization that uses presents financials statements on a comparative basis for any years before adoption:

Analysis of expenses by both functional and natural classification.
Disclosures regarding liquidity and availability of resources.

Furthermore, the Board decided it would be permitted for NFPs to present interim financial statements in the year of adoption as they did prior to the amendment, however, subsequent restatement of the financial statements at year-end would be required on a retrospective basis.

The Board also discussed the application of the consolidation process for not-for-profit entities that are a general partner in a for-profit limited partnership. A result of these discussions is still forthcoming, however, they have decided to reinstate the current guidance that existed in Subtopic 910-20, Consolidation- Control of Partnerships and Similar Entities, and included it within Subtopic 958-810, Not-For-Profit Entities- Consolidation.

To conclude, however long it may be before these amendments become effective- it is always prudent to plan ahead in order to maintain forward longevity in the competitive business environment for not-for-profits.

If you have additional questions about these differences, please contact our office. We would appreciate the opportunity to share with you the impact to your organization and ways to prepare for the upcoming changes.

Josh ([email protected]) is an audit staff working primarily with not-for-profits and healthcare organizations.

Refer to this site for additional updates.

The Game Plan of an Audit

Pam WilliamsOctober 27, 20150 Comment

by Steve Schulz history-telecom-audit

Last week while talking to my brother on the phone he asked me what I did as an auditor. I began explaining what the purpose of an audit was, what some basic procedures were, and what different issues raised during an audit when he stopped me and said he had no idea what I was talking about. I sat there in silence for a second and realized there has to be a better way to explain to someone with no knowledge of accounting what I did day in and day out; then it hit me. As huge football fans, I could compare the two with ease – the players/team were the entity, each play was like a new transaction, and the officials were like the auditors. I called him back and went on to explain the following:

Having the necessary personnel – Having the necessary personnel is essential for both the engagement team and the entity. First and foremost, the audit staff must be independent and possess the proper level of training and knowledge to carry out the engagement(s) at hand. The entity also needs to have the appropriate staff able to handle daily processes that oversee the internal controls and maintain records of transactions. In comparison to football, officials must be unbiased, knowledgeable, and properly trained to work their assigned position. Each side of the ball will need the correct number of players and the offense will need to be in the proper formation before any play can be run. In all respects, failure to have the proper personnel may result in unfavorable conditions that gather insufficient audit evidence used to determine an opinion.

Building off of a strong pre-season – During the pre-season, teams, officials, and the league must prepare efficiently and effectively in order for things to run smoothly during the year. In audit this is similar to the planning stages. When planning the engagement, the audit team will come up with a strategy to understand the scope, timing, and direction of the audit; much like a team devises a game plan going into each game.

The players and the officials – Officials monitor each play just like auditors test the transactions of entities. During fieldwork, auditors will examine different accounts, test controls, and perform other procedures required to meet the needs of the game plan formulated during planning. If the results of the auditor’s test dictate that more testing is necessary, the auditor will need to carry out further procedures to get a better look into the area being tested. In comparison, officials on the field will use their training, judgement, and experience to call plays as accurately as possible however, sometimes they will need to investigate the issue further and will go to the replay system for help. This gives the referee the opportunity to get a closer look at the play and make a more accurate ruling, similar to further audit procedures.

Making the right call – Understanding that not all transactions are perfect, auditors must determine what differences or errors are material and force the auditor to alter their opinion on either the controls or financial statements. Likewise, officials are tasked to make sure that every game is played fairly. Some things, like a holding penalty, will not determine whether a game was played, as a whole, fairly or not but major issues might. An example of this would be like playing with deflated footballs. This would cause an unfair advantage and may cause the contest to come under question and possibly a forfeit. In short, a holding penalty would be the equivalent of a five dollar difference between the receipt and what was recorded in the books while playing with deflated footballs would be the equivalent of a material misstatement.

Langdon & Company LLP has lots of professionals and football fans alike that would be happy to answer any of your audit questions. Please contact our office for more information.

Steve ([email protected]) is a staff auditor with Langdon & Company LLP. He focuses primarily on healthcare and nonprofit organizations.

FASB Delays Effective Date for Revenue Recognition Standard

Pam WilliamsSeptember 16, 20150 Comment

by Rebecca Lunn

On May 28, 2014, Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. However, due to response from stakeholders, the FASB has delayed the effective date by one year. New effective dates are as follows:

Public business entities, certain not-for-profit entities, and certain employee benefit plans would apply ASU 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that year. Early application permitted only as of years beginning after December 15, 2016, including interim reporting periods within that year.
For all other entities, the ASU is effective beginning after December 15, 2018, and interim reporting periods within years beginning after December 15, 2019. Early application permitted as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period; or an annual reporting period beginning after December 15, 2016.

For additional details on ASU 2014-09, please see the earlier blog post written by Lee Byrd. You can also contact our office with any questions.

Building an Effective Board of Directors

Pam WilliamsAugust 31, 20150 Comment

by Rebecca Lunn hands raised

For many organizations, the board of directors is one of their most important tools. A good board of directors can steer the organization in the right direction by adopting comprehensive governance and financial management policies, and ensuring the prudent use of all assets. However, in order to provide sound financial oversight, board members must have a certain level of financial literacy to properly understand the organization’s financial statements.

L&C audit partner, Pam Williams, notes that a board member orientation including information on the financial statements and accounting and audit processes, as well as mission and operational matters, is a good way to educate new board members. An effective board should also have at least one member with a financial background. The organization could even consider having the board member with financial expertise, or the organization’s CFO or Controller, conduct an annual training session for the full board.

Audit partner Karen Stanley states, “You will often rely on the financial experts on the board and outside consultants, such as the organization’s CPA, to interpret the statements for you. But it’s important to remember that everyone has a duty of care to the board.” Perhaps most importantly, board members should be encouraged to ask questions when trends or budget versus actual comparisons appear unreasonable. A simple task, such as reviewing the board financial packets prior to the meeting, can help a board member increase their financial knowledge and be more prepared to ask questions during the board meetings. By taking steps such as these, board members can increase their level of financial expertise in order to fulfill their role and responsibility to the organization.

Additional information can be found online here and here. Please also feel free to contact our office with any questions you have!

Rebecca is an audit senior with Langdon & Company LLP. She has experience working with various non-profits, across many industries.