Hard to believe that we are entering our second spring season under the COVID-19 Pandemic. However, things are looking towards a brighter future as more doses of COVID-19 vaccinations are distributed and positive test rates are continuing to drop in both Los Angeles and Orange Counties. Hopefully, this will lead everybody to more outdoor activities and gatherings this coming summer.
As we talk about the pending summer season, it is not unusual for non-profit organizations to associate the season with their annual financial statement audits. I’m sure most of you are thinking the same thing, “I just finished my last audit, it can’t be time again!” Time has definitely moved forward another year and for most organizations, their last audit was probably the most challenging one in a while. We all had to learn to work remotely and using new technology with most audits conducted virtually through video-shared screens and large file transfers. In addition, there were many new laws and regulations introduced as a result of COVID-19, which has challenged everybody to keep up to date on the changes.
There is no question that the past year has disrupted operations for many non-profit organizations across the nation. Fortunately, many of those non-profit organizations figured out alternative ways of continuing to serve their mission to help those in need while remaining safe. As we approach the upcoming non-profit audit season, here are some helpful tips to prepare for a smooth audit.
Evaluating the collectability of all types of receivables is always an area that auditors look at, but pledges or gift receivables should get extra scrutiny. The world has changed with COVID-19 and donors have responded accordingly. Organizations should be evaluating their pledge or gift receivables for any signs of impairment. Things to consider would me missed scheduled payments, lack of communication from the donor, or if the donor has changed the original pledge agreement. These are all indications for the organization to look into the value of the pledge recorded in their financial statements. If the pledge is determined to be no long viable, the organization will need to write off the entire receivable balance. If there is a possibility of receiving a reduced amount, the receivable will need to be written down to what is expected to be collected. Documenting the analysis of collectability will help the auditors review the balances recorded.
When the stay-at-home orders came down last year, most employees went home without much thoughts of the impact on work. After several weeks, most organizations started gearing up operations by setting up their employees for a remote work environment. This meant purchasing computers and other necessary networking equipment to make working from home like working from the office. Those purchases may exceed an organization’s capitalization policy, so it would be helpful to review large expenditures made last year to ensure they are properly capitalized and depreciated. Having the backup documentation supporting those purchases readily available will make the audit process smoother.
There are PPP loans, EIDL Loans, and other CARES act assistance that were available to non-profit organizations. Each loan is unique with different terms and rules about how to pay it back or possibly have it forgiven. This also applies to how the loan funds are recognized in the financial statements. Accounting guidance allows for a couple of presentation methods and it would be wise to start a discussion with your auditors on the different presentation methods available. For loans that can be forgiven, it’s important to file the appropriate documents in a timely manner so as not to lose out on the opportunity to have the loan forgiven.
The Employee Retention Credit is a tax credit created to encourage organizations to keep staff employed even when operations fell below normal due to COVID-19. Previously, organizations that received PPP loans were ineligible for this credit. In December 2020, Congress amended the eligibility requirements to allow organizations with PPP loans to apply for the tax credit. The credit is calculated based on qualified wages and can be as much as $14,000 per qualified employees. The rules can be very technical and it would wise to discuss with your accountants about the calculation and filing of the appropriate tax forms to take advantage of the credit.
With changes to a remote working environment, organizations may have unknowingly altered the way financial transactions are processed. This would be the perfect year to perform a detail walk-through of the organization’s internal control processes to identify deficiencies or opportunities for improvements. Reviewing this in conjunction with information technology could be beneficial as security over financial data is key given the amounts of data being transferred across the internet.
Frequent communication with the auditors has been the key to timely and efficiently conducted audits. The earlier the communication, the earlier each side has to prepare for the audit. Video screen sharing has enabled virtual meetings where documents can be discussed and issues resolved quicker. Video conferencing has also enabled quick meetings to discuss pending items and issues noted during the audit. The key is communicating timely and periodically so that everybody is on the same page as the goal is having no surprises at the end of the audit process.
Organizations may have experienced some of the helpful tips noted as they went through last year’s audit. However, the upcoming fiscal year-end will most likely be a full year of operations under COVID and the remote working environment. Take the opportunity and prepare early for the audit utilizing the tips mention and hopefully the audit will turn out to be a timely and smooth process.