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7/31/2019 Common Audit Issues -Nonprofit CFOs
1/19
January 13, 2012
Common Audit Issues for Nonprofit
CFOs and How to Avoid
Christian Spencer, CPA
Director
(202) 419-5124
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Agenda
Common issues noted
Other issues noted
How to avoid audit issues
Questions/ discussion
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Roll of the typical CFO..
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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 dutiesbeing 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 forincompatible functions
Provide monthly check register and bank statement to Treasurer orfinance committee as they are independent of reconciliation and
approval process
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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 besegregated
Controller should review and approve entries prior to posting
Compensating control - print out a list of all posted journalentries at months end. This should be reviewed andapproved by the Controller
Review and approval should be documented and availableduring the audit process to verify the control was in place andproperly executed
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Common issues noted
Incomplete Documentation
Most organizations have an accounting policies and proceduresmanual, but often times no documentation of the executedcontrol exists
Monthly close process, investigation of significant budget toactual variances, and approval of journal entries are commonareas of this occurrence
Example- controller may review all reconciliations performed bythe accounting staff; however, no documentation exists of this
review Solution- preparer and reviewer should sign and date manual
reconciliations
For less paper intensive environments- use of a monthly closechecklist is also effective as it summarizes specific close
procedures and provides trail of controls executed
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Common issues noted
Lease Agreements
Application of FAS 13 (ASC 840) is still in effect until the revisedstandard 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 leasepayments and a corresponding right of use asset will berecorded at the inception of the lease
Amortization of the asset and reduction of the liability will occuras lease payments are made
New standard most likely still several years away from beingadopted
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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 deferredrent 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 impactfinancial covenants
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Common issues noted
Contract Reviews Who is authorized to enter into contracts on the Organizations
behalf
Organization needs to ensure that contracts are reviewed foroperational and financial implications before they are executed
Example # 1- Director of fundraising for a museum enters intoan agreement with a beverage company to exclusively offer onlythat companys products in its restaurant
During the audit the agreement is reviewed and the exclusiveprovider provision is discovered with triggers taxable unrelated
business income
Director of fundraising was not familiar with unrelated businessincome provisions and neither the CFO nor legal counsel wereconsulted prior to execution of the agreement
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Common issues noted
Example # 2- An organization has a policy that future sites for itsconvention are evaluated and selected by a committee of the boardof directors. The head of the committee enters into a contractobligating the organization to hold its 2014 event at a hotel in LasVegas
Subsequent to the execution of the agreement, the CFO notes thelarge block of hotel rooms that the organization is required to fill.Based on past experience he knows it will be difficult to fill this largeblock
As a result the organization has exposed itself to a potential attritionpenalty because the CFO was not consulted to review the contractprior to its execution
Important that all significant contracts be reviewed by qualifiedindividuals prior to execution
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Common audit issue noted
Evaluating significant estimates
Allowance for doubtful accounts receivable, discounts used invaluation of future promises to give, reserve for nonsalableinventory, and discount rates used in actuarial valuations arecommon estimates
Common issue is that estimates are not adjusted annually forcurrent events or there is no systematic rationale for the estimate
There should be a documented process for significant estimatesthat 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 otheritems known to be uncollectible
Example # 2- inventory is reviewed annually for slow-moving itemsand a reserve for nonsalable inventory is established for any itemsthat are deemed nonsalable based upon recent sales activity
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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 properlycoded
Coding was not done timely and followed up by accountingdepartment
Large suspense account had to be reconciled at year end
Lack of internal controls over wire transfers
Policies and procedures manual addresses cash disbursementsbut not wires
Situations were wires were not required to be confirmed by aseparate individual
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Other issues noted
Levels of board designated net assets that create negativeunrestricted net assets.
Net assets can not be designated by the board so as to createan unrestricted deficit
You have essentially designated more net assets than you haveavailable
No documented whistleblower or document destruction policy
These are the only two provisions of the Sarbanes OxleyAct required to be adopted by all organizations
Governance section of Form 990 have specific questions aboutthese policies
Still seeing organizations that dont have these policies
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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 largedeferred revenue balances
Many loans require quarterly covenant calculations be submittedto the bank
Managements responsibility to monitor covenants to ensurecompliance
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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 auditors 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 ortwo in arrears in terms of the alternative investments
Consult directly with the fund manager to obtain most recentvalue
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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 landmarkreport on internal control. Internal ControlIntegratedFramework, which is often referred to as "COSO"provides a sound basis for establishing internalcontrol systems and determining their effectiveness
The report outlines five essential components of aneffective internal control system
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How to avoid audit issues
Control Environment- sets the tone of an organization byinfluencing the control consciousness of its people. The tone isestablished through the actions of management and the governingbody. (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 thatensure management objectives are achieved and risk mitigationstrategies are carried out
Information and Communication- communicates controlresponsibilities to employees, board members and others byproviding timely, accurate, and relevant information
Monitoring- are the processes that assess the quality of the
internal control performance over time
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How to avoid audit issues
Proper segregation of duties
Use of a monthly close checklist to facilitate complete, accurateand timely monthly reconciliations
Documentation of procedures performed and controls
executed
Consult your audit firm as an educational resource throughoutthe 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
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Speaker Biography
Christian Spencer, CPA, is a senior audit manager with over16 years of public accounting experience, including 13 yearsworking exclusively with nonprofit organizations. Prior to
joining Tate & Tryon in September 2011, Mr. Spencer workedas a director in the Vienna, VA offices of McGladrey & Pullen,LLP where he spent 13 years providing audit and taxservices to nonprofit organizations with annual revenues
ranging from $1 million to over $300 million. Mr. Spencersexperience includes planning and managing the audits of awide range of nonprofit organizations, including associations,charitable and educational organizations including those withfor-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 shelterservices to individuals in need. In addition, he is a member of the Finance andBusiness Operations Section Council of the American Society of AssociationExecutives. He participates in ongoing continuing education courses for not-for-profit accounting and has written articles for various publications.