As I sit here to write this, I have handed in our board approved signed financial audited statements to my finance partner who will then scan for publication on Inyathelo’s website and for our annual report.
As a finance director, it is a moment of satisfaction. The formal Board approval of financial statements culminates in months of preparation by our internal finance team and weeks by the external manager and his team. Inyathelo has had clean audits since its inception in 2002 and our current internal finance team has completed its 10th annual nonprofit financial external audit.
Inyathelo is externally audited by a top global accountancy firm on an annual basis. It is in this light that it seemed an appropriate time to share some of our learnings and methods that have assisted us in completing an external nonprofit audit.
The External Financial Audit Process
Be prepared with your documentation
A key part in contributing to a smooth audit is being prepared. Help to instil a culture throughout your organisation of diligent record keeping. While this is driven by the finance office, all employees who requisition payments must play a role. Each transaction should be backed by necessary documentation, from a request for purchase, to invoicing, to authorisation of signatures and complete information on financial allocations in the budget for each income and expense. It is important to keep a trail of each and every transaction both in and out of the bank account, and to have supporting documents. Each transaction package should not get a final signature, unless all documents applicable (including accurate and complete VAT invoices,) are attached. If you are consistent about this throughout the year, and conduct monthly internal audits, you will avoid scrambling at audit crunch time. You will also find that if you are clear in explaining the reasons for this diligence to employees, they will assist you in maintaining a systematic approach.
This consistency would also include ensuring that your accounts are reconciled on a monthly basis and that your accounting software systems are updated on a continual basis.
Meet your audit manager beforehand
This may sound like a given, but it is important to set up a face to face meeting with your audit manager beforehand. This will be the person dedicated to manage the audit job and lead a team of auditors during the onsite process. A letter of engagement will need to be signed and a quote obtained.
It is also advisable to set out a calendar schedule with your auditors regarding the plan and document due dates for review. The auditors may be physically present at your offices for one week, but there will be several weeks on either end of this in preparation of the final statements.
Client Assistant List
Prior to the audit, it is helpful to obtain a ‘Client Assistant List’ which will outline key information that the auditors require you to collate i.e. service provider contracts, bank statements, fixed asset register, employment contracts, Board minutes and resolutions, etc.
You may be asked to prepare summaries that they will cross reference including:
- Grants, Donations and other income Schedule;
- Leave Day liability balance calculations;
- Future Income and Expenditure budget;
- Monthly Fixed Cost Assessment;
- Debtors and Creditors Lists;
- Statement about your sustainability strategy and entity as a going concern.
Depending on the size of your organisation and your record keeping and processes, the external audit can be a gruelling process and take many days. It is important to dedicate a quiet space for the auditing team at your offices. Preferably, this should be a secure room that can be locked at the end of each day. This ensures that confidential information can be kept safe, and the integrity of the data and the documents can be secured at the end of each day.
Don’t be alarmed that your auditors will have several queries throughout the process as they work through the documentation. They will also ask you to locate physical assets and may request you to identify the individuals working in the organisation (as a means to verify individuals on the payroll). It is essential for them to obtain clarity and it is helpful for your organisation to probe any issues and assess what is needed. It is important to answer requests for information timely, honestly and with accuracy. This process is incidentally a very helpful one to the organisation, and should be viewed as a mutual step to reaching the ultimate goal of closing accounts satisfactorily.
The Fraud and Error Interview
As part of the audit, your external auditors will conduct a fraud and error interview. They will not provide you with questions before hand, but will interview the finance director and other relevant management and staff members. The aim of this interview is to assess the organisation in terms of adherence to company policies and procedure and if this could compromise financial information, integrity and decision making in any way. If there is one key element to guide you during this process, it is to be honest. Completely honest. As much as an audit process is a ‘check’, it is also a valuable process to help you assess your organisation and ensure accountability and good governance. The auditor may check in with his internal risk assessment team, to evaluate any issues and come back with suggestions.
Review and Presentation
Be a Part of the Discussion
Although financial accounting standards are set out to provide consistency, the story behind a nonprofit’s financial statements do not present the same story as corporate financial statements. It is important to discuss the presentation of accounts, so that the entity is comfortable with the presentation being true and fair as it pertains to its activity. For example, a nonprofit’s performance cannot be measured by the bottom line. The definition of a ‘profit’ on the income statement represents a ‘surplus’ for a nonprofit, and is no indication of financial performance. It is perfectly acceptable to request to include supplementary notes to explain these figures further in the context of a nonprofit.
A further example relates to the comparison of expenses. Generally in the for-profit world, it is beneficial to reduce expenses. In the nonprofit space, an increase of indirect expenses is not indicative of poor performance, but could be directly related to approved programme growth. Therefore, it is important that both you and the auditor are comfortable with the presentation of accounts, because you will have to be able to explain it to all key stakeholders.
Presentation and engagement
It is important for the auditor to present the financial statements to your senior management, your finance sub-committee and then finally to the Board. The finance director must also assist to answer queries, during these presentations, to provide clarification about day to day financial activity during the year.
This presentation will fuel discussion around activity and raise issues for consideration. It also helps to encourage a wider audience to become aware of the financial backbone of the organisation. This helps to build buy-in, into the finance process and financial strategy of the organisation. It also allows your programmatic team to be able to reflect on their activities, and how this fits within the organisational financial story for the year around successes and potential future impact.
Management Report and Implementing Recommendations
One of the outputs of a financial audit is the management report submitted by the auditors to the organisation. This tool highlights issues and suggestions around improved financial process and policies. Management will have an opportunity to respond in writing on the document itself. These recommendations should be seriously considered and implemented for improvement. While this is not a standard donor document and auditors have used it to place the entity’s issues and how they are dealing with them on file, it is increasingly being requested by potential donors in their funding application package. It is important to ensure that these recommended improvements are being prioritised. It can also serve as a helpful tool for organisational learning and development.
Analyse and Report to the Board
In addition to the financial audited statements being presented at your Board meeting, it is important for the finance director to present a separate financial report to the board that covers a financial analysis of activity related to the audited financial statements. What income generating opportunities were successful? What are the explanations of shifts in the financial statements based on line items from the current year compared with the previous year? What trends are developing and how do these compare with a snapshot over the past five years? It is always important to gaze back at past financial performance in order to forge constructively ahead. The finance director’s report should be shaped around the results of your audited financial statements and presented in a constructive, relevant and visual way in order to inform your Board about key performance areas and recommendations going forward.
The final step in the closure of the audit process is to disseminate. Once your financials are signed, put the document on your website and include this in your annual report. The NPO Directorate requires that financial statements are submitted within six months of the close of the financial year. Some entities prefer to include a condensed version of their financials in the annual report while others prefer to include the whole document. This information is helpful to your stakeholders and provides a level of transparency and governance of the organisation and should therefore be readily accessible.
In conclusion, the audit process need not be a daunting and laboursome one if your organisation is consistent with its recordkeeping throughout the year. The process provides an excellent opportunity to reflect on the organisation; its past, its present and contemplate its launch into the future!
Soraya Joonas is a finance director at Inyathelo: The South African Institute for Advancement. This article first appeared on the Inyathelo website.
Photo Courtesy: iau