As 2020 draws to a close, many charitable organizations are racing to finish items on their nonprofit audit preparation checklist and complete their annual independent financial statement audits. Audits are, of course, a common fixture of nonprofit life. In important ways, however, this year’s audit will not be business as usual. Many audits are being conducted remotely, for instance, to comply with stay-at-home orders and manage potential risks to employees’ health. But more than that, the world social and economic landscapes have been transformed by the pandemic, and that in turn has fundamentally changed how many nonprofits operate. It is simply unavoidable that all that is going to have an impact on financial statements.
More than just regulatory compliance, independent audits of financial statements are crucial for maintaining trust with donors, applying for funds and having a reliable picture of the financial health of your organization. To help ensure you receive the results you want from an audit, proper preparation is crucial. BPM’s advisory and assurance teams have helped nonprofits prepare and execute numerous audits this year, respectively. In that time, we have observed certain trends and identified some common pain points for nonprofits regarding how to handle changes due to COVID. While these items have not been featured on nonprofit audit preparation checklists in the past, it is important to make sure to add them now.
1. Disclosing COVID-19 Impacts
The impact of stay-at-home orders, event limitations and related public health-based restrictions has been especially hard on nonprofits, as their ability to operate and perform their missions depend heavily on galas, auctions and other in-person fundraising strategies. The cancellation of these events for the foreseeable future may have a significant financial impact on these organizations. So too will any precipitous drops in donations or increases in technology costs required to manage a remote workforce.
All of that, of course, needs to be disclosed on the financial statement. Some key disclosures many nonprofits are making this year include disclosure of loss contingencies, which is required when there is reasonable certainty that a loss has been incurred; risks and uncertainties disclosure, which should be disclosed when certain risks or uncertainties could significantly change the amounts reported in the near-term future; and the going concern disclosure, which is required when management has substantial doubt regarding the organization’s ability to meet its financial obligations for at least the 12 months following the issuing of the financial statement.
These represent just a few of the disclosures nonprofits may need to make on this year’s financial statements. For a full analysis and judgments that will stand up to an independent audit, your BPM advisor will be an invaluable resource here.
2. Disclosing PPP Loans
Many nonprofits accepted Paycheck Protection Program (PPP) loans from the Small Business Administration at the height of the COVID recession, when the immediate concern was keeping the organization running and making payroll. Documentation and reporting may not have been top of mind. Six months or more down the line, however, and the time for many nonprofits has come where they must determine how to disclose these loans on their financial statements. This is complicated further by the possibility of PPP forgiveness for much or all of these loans.
Thankfully, the format for disclosing PPP loans on the financial statement is relatively simple. The first thing to know is PPP loans justify a separate footnote disclosure on the financial statement. This footnote disclosure should include, at the very least, the amount received from the program, the accounting method used to record the original loan and recognize loan forgiveness, the amount of the loan that was forgiven and the amount that was not forgiven and will need to be repaid, and the terms of the loan repayment (i.e., repayment dates and interest rates).
Nonprofit leaders should however know the footnote disclosure is just one aspect of accounting for PPP loans. Generally-accepted accounting principles (GAAP) require nonprofits take very specific steps to recording the forgivable loans, and there are aspects of this process that require considerable judgment that only an accountant experienced with GAAP can provide. Again, consulting your BPM advisor is the best step you can take to prepare for your organization’s independent financial statement audit.
3. Updating Accounting Policies and Procedures Manual
Almost universally COVID has led to numerous organizational shifts in the nonprofit sector. Many nonprofit organizations laid off staff, for instance, a tough decision that tends to create its own headaches for management and those employees who remain. Turnover is also significantly higher for many nonprofits this year, as many employees have left or moved away for their own personal reasons. The upshot is personnel charts that may have been valid as recently as eight or nine months ago can no longer be relied upon to provide an accurate picture of the organization.
Simultaneously, many organizations have been forced to rapidly transform their policies and procedures, such as those surrounding expenditures, payroll, reimbursements and donations. Before COVID-19, cutting checks was still a relatively common practice in the nonprofit space, particularly in comparison to the wider business community. With many employees still working from home, nonprofits have adapted to digital solutions to complete these critical transactions.
These are all aspects of the nonprofit that a financial statement auditor will be particularly interested in reviewing, precisely because of the potential effects of COVID. These kinds of changes will have plainly affected the key pathways by which money passes through the organization, and having effective, written internal controls to avoid loss or shrinkage is an important metric which auditors adjudicate on. To help ensure your organization gives a good showing in this important part of the financial statement audit, nonprofit leaders should be sure they work with human resources and accounting to produce accurate organizational charts and a fully updated policies and procedures manual.
To learn more about how BPM can help your organization prepare for a financial statement audit during an unprecedented year, contact Kristen Oshiro at [email protected].