The yin and yang of it
Preparing annual audited financial statements

When it’s time to prepare annual audited financial statements, you may find it difficult to determine where the responsibilities lie. With your auditor on one side of the equation and your management and board on the other, it’s important to clearly define — and understand — each party’s roles and responsibilities. Remember, both sides have a similar goal in mind: an end product that fairly and accurately represents your organization’s financial health.

Auditor VS. management

At the most basic level, your auditor is responsible for expressing an opinion on your financial statements. Beyond that, the auditor is responsible for obtaining reasonable assurance that your financial statements are free of material misstatement — be it from error or fraud.

Management, on the other hand, is responsible for developing estimates, such as the allowance for bad debts, adopting sound accounting policies, and establishing, maintaining and monitoring internal controls, as clearly outlined in the American Institute of Certified Public Accountants’ standards. Although your auditor may make suggestions about these items, it isn’t his or her responsibility to institute them or to ensure they’re working properly.

What your auditor can do is evaluate whether the assumptions that management used to make decisions on internal controls, accounting policies and deterring and detecting fraud are current and applicable — and won’t materially misstate the financial statements. But deciding what to use, and when to use it, is strictly management’s responsibility. If the audit is performed in accordance with Government Auditing Standards, the restrictions on what an auditor can do to assist are even more stringent.

Leadership team

During these processes your auditor and board of directors can be great resources for your management team. Your auditor, however, can’t help management pick and implement policies. The auditor must maintain independence, in both fact and appearance, in the public eye.

Conversely, your board — often an untapped resource — can assist you. As your organization’s watchdog, it has significant fiduciary responsibilities that dovetail many of your duties. Often, members have related experience and suggestions for completing the job that they’re willing to share. Also see “Get a board that can help” on this page.

Format and comparisons

Annual financial statements are designed to help you manage your organization. Financial statement items — such as debt ratios, program vs. administrative expense ratios and restricted vs. unrestricted resources — can indicate how a nonprofit is doing. So when your nonprofit’s leadership team is preparing them, you want to make sure the statements are as user friendly as possible.

One of the best ways to see the big financial picture is to compare your budget, your year end internally generated financial statements, and the financial statements generated during the annual audit. This comparison can be completed more easily if the format of your annual audited statements is as close as possible to that of your internal financial statements and budgets.

Through a review of internal vs. audited state-ments, you can look for any large differences in individual accounts resulting from audit correcting adjustments — these are often an indication of an internal accounting deficiency. You’ll also be able to spot any significant discrepancies between what was budgeted for the year and the actual outcome.

These variances will help you to evaluate your organization’s performance and plan for the following year. Also, your financial statements should make it fairly easy to determine which of your resources are restricted for particular purposes or time periods.

A nonprofit’s statement of activity and statement of financial position could show a strong financial status overall. But if the financial resources giving rise to the positive results are restricted to a particular purpose beyond regular operating activities, your management and board could come away with a mistaken impression of the organization’s financial health.

For example, donations — either investments or cash — given strictly to keep a maintenance fund for your building could show assets at a higher value even though your organization was barely able to break even on its basic programs. So, statements should clearly identify restricted resources when they are received and while they are held by the organization at any point in time.

A takeaway point

In the end, auditors and management have the same goal: a correct and user-friendly set of financial statements. Although most of the responsibility rests on management’s shoulders, only by working together can the two sides be successful. •

Get a board that can help

Sometimes the board of directors’ role is overlooked in annual financial statement preparation — and that’s a mistake. Management must make sure that the board meets its fiduciary duties in overseeing this function.

The best time to start is when you’re assembling your board. Make sure your prime candidates possess these qualities:

Knowledge — and possibly professional skills — of use to the organization,

• Passion about the mission,
• Commitment to the organization’s success, and
• A willingness to devote adequate amounts of time.

Once the best board members are in place, encourage them to ask questions, come up with new ideas to implement and keep an open dialogue, especially on new topics. All of this will help board members contribute to your organization. And having a board that is able to help guide the organization through significant financial and accounting policy decisions will pay off.