Forewarned Is Forearmed when It Comes to Audits
By John Cohen
Under the best of circumstances a state or federal audit, especially when conducted by the Inspector Generals staff, disrupts your agencys operations, sometimes for months, and can be a significant cause for concern for you and your board.
Even the most diligent nonprofit managers make innocent mistakes (or incorrect interpretations), and the thought of having costs disallowed after spending government-provided funds with the best of intentions is not pleasant.
To be forewarned is to be forearmed, so here are some tips gleaned from recent audit reports and personal experience.
1. Internal Controls
Audit reports always, always mention the agencys internal control system. While the auditors arent there to assess it step by step, its the first thing on their checklist. If you dont have a procedures manual, or havent updated it in years, the auditors can understandably start out with some cynicism. And dont forget that the auditors are likely to interview employees. At one agency, a veteran administrator said she didnt even know there was a procedures manual she was supposed to follow.
Audit reports frequently have a finding relating to payroll distribution, and these can be incredibly costly. If your employees fill out time sheets based on their budgeted percentages of time to each project rather than actual timeyoure in trouble. And if an interviewee says, I dont charge much time to that project because it doesnt have enough funding, your problems just multiplied.
3. Occupancy Costs
Occupancy costs are always closely examined and the allocation methodology questioned. Its important to have a simple, written, well thought-out methodology. The methodology can be general and multiple choice for different situations, but if it appears that you were charging the programs based on the funding availability, the consequences can be severe. It is important to keep in mind that every single project at every single location needs to have an occupancy cost or documentation that shows it is insignificant. Without documentation, the auditors will have no basis to agree with you, and it can become an issue that will cost you money. If you acquire a new program mid-year, be sure to re-do your occupancy allocation to include the new program. Some organizations recalculate monthly.
Equipment purchases generally require pre-acquisition special approval and post-acquisition proof that it is inventoried. The wording in the federal Office of Management and Budget circulars can be ambiguous, but why risk it? Strict compliance isnt that difficult, and paying back thousands of dollars for lack of a few minutes extra effort will sting.
While this term is never used in reports, some reports reek of bad attitude by the agency under audit. If you have made a mistake, admit to it and think creatively about how to minimize the impact. If you insist that youre right in spite of the facts, or if you make up an implausible rationale and repeat it ad nauseam, you will only extend the length of the audit disruption and lose credibility in areas where you could have reached a compromise solution. The auditors are generally just trying to do their jobs objectively, not trying to play gotcha, so antagonizing them with an above the law attitude is not a wise path.
John Cohen is Managing Director of NPA Consultants, nonprofit process improvement specialists. Contact him at John.Cohen@NPaccountants.org or 617 694 4600.