Audit Manager Laura Phippen Discusses Auditing Non-Profits

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Laura Phippen is an audit manager for White Nelson Diehl Evans LLP. She began as an intern with the firm in 2000, and became a full-time employee in 2001. She earned her bachelor of arts degree in business administration with a concentration in accounting from California State University in Fullerton. Her primary area of expertise is the non-profit business sector. She recently sat down for an interview with Knowledge Applied to discuss her work with non-profit organizations.

How often should a non-profit organization do an external audit? How important is size in determining this frequency?

In the State of California, the Nonprofit Integrity Act of 2004 (with an effective date January 1, 2005) requires that charitable corporations, unincorporated associations and trusts (”non-profits”) must file with the Attorney General of Charitable Trusts their articles of incorporation or other documents governing the organization’s operations within 30 days after initial receipt of property.  These organizations are required by the Act to prepare annual financial statements audited by an independent certified public accountant if they have gross revenues of $2 million or more. The audited financial statements must be made available for inspection by the Attorney General and the public no later than nine months after the close of the fiscal year covered by the financial statement. The $2 million-threshold excludes grants received from governmental entities if the nonprofit must provide an accounting of how it used the grant funds.

The federal government requires that nonprofit organizations spending $500,000 or more in federal contract funds in a fiscal year obtain a single audit report to ensure that they comply with federal grant management procedures. This is in addition to the financial statement audit.

Start-up non-profit organizations may find it difficult to obtain funding (grants, contracts and contributions) because the donor(s) would like to see audited financial statements and the most recently filed Form 990. Unfortunately, most of the time the organization can’t afford an audit due to lack of funding or they have only filed the Form 990-N (otherwise referred to as the “postcard”) or Form 990-EZ which both provide limited information.

Nonprofit organizations must constantly demonstrate where they receive money from, where those funds go and what percentage is used for charitable work. While no official requirements for a non-profit audit may exist for those organizations under the $2 million threshold, most organizations require audits in their bylaws. The annual audit is an essential component for closing the fiscal year and showing that the nonprofit spent the donated money according to the mission of the organization.

What are the benefits of regular external audits?  What problems can be avoided with regular external audits?

Regular external audits provide reassurance to current donors and prospective donors that funds are being spent appropriately.  Additionally, they can help protect those in management and those charged with governance (the board of directors) from unnecessary charges of carelessness or misappropriation in handling funds. Audits may help identify areas of internal control weaknesses, send a favorable message and build trust and confidence among the financial supporters of the organization, encourage good habits of fiscal responsibility and strengthen financial reporting for future periods.

Is the IRS auditing non-profit organizations more frequently now?  How can regular external audits help a non-profit avoid such audits?

Yes the IRS is auditing more frequently now, and state and local governments which contribute to non-profits are auditing more often as well. Having an external auditor review a non-profit’s Form 990 can help avoid such audits, because these forms have become more complicated to complete and the external auditor understands what the government auditor is looking for.

When you audit non-profits, what are some common problems you find?  How effective have you been at providing solutions?

One common problem I see is a lack of segregation of duties due to the size of the organization’s financial staff. A non-profit’s main purpose is its mission; the financial side is usually somewhere further down on the list of priorities.  There is often a lack of knowledge of Generally Accepted Accounting Principles (GAAP) and/or reporting requirements.  In many cases I’ve been able to assist organizations in identifying the areas that need improvement and provide suggestions to implement new policies and procedures.  I’ve found that most appreciate the guidance.

What should a non-profit organization look for in selecting an accounting firm to perform an external audit?

They should choose a firm with a lot of experience dealing with non-profit organizations.

How many non-profit clients does White Nelson Diehl Evans serve?  What is the range of size of these organizations, and what are some of the categories into which they fall?

Approximately 10% of our business is non-profits.  Their size ranges from the start-up organization at $1 to $70 million in net assets.  Their missions are in areas such as the development and support of boys and girls to better themselves, child education, child development, feeding the hungry (children, elderly, homeless), clothing the needy, environmental protection and private foundations supporting local communities and the arts.

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