May 2007 NEWSLETTER: Financial Literacy for Not-for-Profits
"Financial Literacy for Not-for-Profits"
This newsletter is a free service to the North American not-for-profit community from William Harper Associates. Its focus is on helping organizations that do good, do better ... by helping Not-for-Profit Boards and managers improve their understanding of financial management and reporting concepts, and implementing practical, effective financial controls and processes.
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May 2007: Financial Literacy for Not-for-Profits
This month's Financial Literacy Newsletter answers the following questions:
1. Why are our annual audited financial statements so late?
2. What is the relationship between the business plan and the annual budget? and
3. Term of the Month - Internal Controls
Why are our annual audited financial statements so late?
The annual audit is an important process that adds credibility to your annual financial statements. But, it seems that the audit process can take several months. There are a number of reasons for this, some of which can be managed to reduce the time taken, while others are inherent in the audit process.
Typically (for smaller organizations in particular), the work of the auditor is not even started until sometime after the end of the fiscal year. This is a matter of efficiency in most cases, since coming in during the year to do only a part of the auditor's work means that they will have to return after year-end in any event, with the two visits increasing the time required for the overall audit effort.
How far after year-end the audit work happens is also a matter of scheduling between the client and auditor. You may need to avoid certain busy periods, staff vacations, and so on. The auditor on the other hand also needs to schedule your work along with that of all their other clients. This can be a challenge, since much of the auditor's workload tends to happen in 'clumps', for example, around tax season (this may not be an issue for you, but it likely will be for your auditor). This scheduling delay can sometimes add months to the process itself, and it is important to be in early contact with your auditor if you want to minimize this delay.
The actual audit work also takes some time, anywhere from just a day or two, to several weeks. During this time, the auditor (or auditors if more than one person is on the job) will need fairly frequent access to your accounting person and management, and these people still have ongoing jobs to do as well. So, at times, your own staff will be the bottleneck. The actual time spent on-premises is typically a fraction of the elapsed time-to-completion, however.
Near the end of the process, the auditor finishes the on-site work, and disappears - so where are the statements? Well, depending on how your auditing firm is organized, one or more people may need to review the work done, ask questions, get answers from the staff member who did the work, and so on. Again, there is a question of scheduling for all concerned.
It is also important to remember that the financial statements themselves are yours, not the auditor's. Questions about disclosures, wording and so on are therefore ultimately yours to answer. The auditor is sometimes left waiting for answers to questions about these matters, particularly where you are relying on a volunteer (e.g. Board member) to address them. A proactive auditor will make sure, however, that you are clear on what questions are waiting to be answered.
If you are concerned about the timeliness of the audit process, clear communication of your expectations with your auditor, at an early date (i.e. well before the end of the year) is vital. Here are the things you can do on your end to accelerate the process to the greatest extent possible:
- be clear about your timelines, deadlines and expectations;
- be prepared - if your auditor requests particular pieces of information (before starting the fieldwork, for example), be sure to have it ready, or let them know ahead of time if it's not;
- provide a single, senior point of contact for the auditor to deal with on outstanding issues; and
- ensure that your key volunteers (e.g. your Treasurer) also know your timelines and requirements, and that they will be available to make needed comments or decisions within those timelines.
If very timely statements are required, the auditor can take a different approach to their audit work, significantly reducing the calendar delay for completing the work, but increasing the total work effort and, therefore, fees. You, as client, can choose if the added timeliness is worth the added cost.
What is the relationship between the business plan and the annual budget?
The business plan (or operating plan) is your roadmap for the coming year's activities. It answers the "who, when, how, where and what" questions. So, how does the budget relate to this important document? Well, the budget is essentially a part of the plan, one facet of the overall document. The budget answers the "how much" financial questions that naturally arise from the other questions.
In organizations where all the planning focus is on preparing the budget, we normally suggest that they are putting the cart before the horse - you can't have a budget without a plan! While it seems like more work, committing that plan to paper and getting consensus on it, will pay valuable dividends going forward. Ensuring everyone is on the same page as far as plans for the coming year makes budgeting (and operating!) so much easier.
Once you have a plan that everyone supports, preparing the budget becomes more of a translation exercise than an exercise in creativity. It is a matter of simply converting the "who, when, how, where and what" of the plan into "how much". Now, suggesting this is always simple may be an exaggeration, but it sure is easier than trying to create a budget without knowing the answers to these other questions!
The mechanics of preparing a budget are beyond the scope of this article. But, those mechanics rely on having clear answers to the "who, when, how, where and what" questions about the budget period before you start.
Term of the Month - Internal Controls
"Internal controls" are procedures and practices within your organization that help to protect your assets, and ensure the accurate approval, recording and reporting of transactions. Many, but not all, of these controls will relate specifically to accounting and financial reporting activities.
A critical type of internal control in most organizations - and one that is particularly difficult to implement in smaller organizations - is segregation of duties, that is, ensuring no one person has responsibility for the various stages of processing a transaction: approval, recording/reporting, and custody of assets. Where there is no segregation of these duties, one person could commit a fraudulent act - or, more likely, make a mistake - and cover the fact up for quite some time. Having multiple people responsible for the different stages of a transaction means that no one person can allow this to take place.
Other examples of internal controls include: having multiple cheque signers, preparing bank (and other account) reconciliations on a regular (monthly) basis, and having management and Board members conduct a meaningful and thoughtful review of interim financial statements.
William Harper is a Chartered Accountant, and has broad experience in financial management and all aspects of audit and internal control processes. Contact us for help.