When the Australian Charities and Not-for-Profit Commission (ACNC) launched in 2012, it ushered in a new era of accountability and regulation in the charity and NFP sector.
Since then, charities and NFP organisations with yearly revenue exceeding $250,000 but less than $1 million have been required to have their annual financial statements reviewed or audited. Those above the $1 million threshold need to have their financial statements audited.
For the first time, the finances of charities and the NFP sector were subject to independent external scrutiny. However, this added scrutiny has come at a cost. Professional services are not cheap, plus an organisation’s staff members have to deal with the ever-increasing level of audit inquiries.
Charities and NFP organisations seeking to manage their administrative overheads may feel that there is no way to shrink these audit fees. However, whether the goal is to cut costs or to garner more value from the annual audit, there are steps that can be taken…
Consider not having an audit: The current rules allow charities and NFP entities with an annual revenue of between $250,000 and $1 million to have an audit or a review. An audit requires the auditor to express an opinion as to the legitimacy and completeness of the financial statements, and is the highest level of practicable assurance. In contrast, a review is a lower level of assurance on the reliability of the financial statements, and is based on analytical procedures and management inquiries. The advantage of a review is that it allows an auditor to take a flexible approach, and to limit the scope of their work in a way appropriate to the size and complexity of the organisation.
Correct any weaknesses in internal control systems: As a general rule, the weaker an organisation’s systems, the more time an auditor will need. An external service provider can be engaged to work with the organisation in this area. The cost of such a consulting engagement may more than pay for itself through reduced audit fees.
Set expectations Hold at least two planning sessions with your internal team and the audit firm before the audit, and agree to a timetable. Agree on the number of transactions the auditor will undertake in each category of the financial statements. If you feel that sample sizes are too high, do not just accept them – ask for an explanation as to how they have been calculated.
Be ready: Nothing the auditors should ask for should be a surprise. All necessary information sought by the auditor should be ready when they walk in the door. Prepare detailed support for major numbers in the financial statements, appoint one person to handle auditor information requests, and hold daily 15-minute status checks with the senior auditor or manager on the account, as well as weekly meetings with the audit partner.
Stay in contact: Keep your auditors in the loop on all major developments throughout the year, from new service lines to how the organisation intends to comply with new accounting pronouncements. To jog the auditors’ memory at year end, summarise the decisions in memos.
Do a hard monthly close: By doing this, the work needed to end the year could merely amount to that of adding a month.
Negotiate with your auditor: Understand the makeup of your fee, Where systems and processes have improved from the previous year, negotiate this into the pricing.
Consider changing auditors: Identify potential successors and submit a request for proposal. Consider whether a large firm or smaller one would be a better fit for your organisation. Be aware, though, that a successor will usually spend substantially more time the first year, and the disruptive effects of changing firms can also be a complication.
Bring in lunch: Ensure the audit team is not distracted, such as having to seek out new places to eat each day. A lunch session also provides an avenue for working sessions if needed.
Charities and NFP organisations that have low audit costs, or are lucky enough to have pro-bono audit services, the focus can be moved to value. One of the best ways to gain value is to change the focus of the audit each year. Negotiate with your auditor to target particular areas rather than letting them do the same old thing year after year. For example identify three to five business conditions you expect to face in the next year, and ask the audit firm to comment on your current position and the available options.
You may want to take advantage of the changes in funding models. How are you positioned? What should you do? You may be facing ever-increasing administration costs. The auditor should be able to help find ways to ensure efficiency.
Following these tips should ensure that your organisation is ready for its next audit, while associated costs are kept to a minimum with the maximum value extracted.
Sean McGurk is partner, audit and assurance, at Crowe Horwath. This article originally appeared in the March issue of Third Sector magazine. Subscribe now.