Important Audit Areas in Not-for-Profit Organizations

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Not-for-profit (NFP) organizations have faced their own set of struggles while dealing with the coronavirus.  While there are some common struggles among all companies tasked with operating during the coronavirus, NFP organizations have been uniquely affected.  The proper reporting of both going concern and subsequent events as well as coronavirus assistance and relief are audit areas that are of increased concern due to COVID-19.  There is also a heightened fraud risk in the areas of restricted net assets and wire transfers.   

One big area of higher risk for NFP organizations is going concern and subsequent event reporting in the financial statements.  For many NFP organizations, large fundraising events (often held annually) bring in a major amount of funding.  COVID-19 stopped organizations from holding these events and most were canceled or held virtually, which greatly reduced the revenue earned.  Many NFP organizations rely on membership fees and dues for their primary source of income.  Because members could not benefit from their memberships during the coronavirus, membership dues revenue was reduced greatly.  Auditors need to evaluate an organization’s going concern if there has been significant reductions in revenue.  Evaluating the collectability of large receivables after year-end is exceedingly important in determining the need for subsequent event disclosures.  There is also a greater risk of asset impairment during the coronavirus and this risk will require evaluation.  While their traditional sources of revenue have decreased, NFP organizations have seen other sources of revenue.  Some of these organizations have benefitted by receiving government supplements and aid that would not normally be received.  For some organizations, communities have stepped up to support the NFP organizations in the current year, knowing that they will be able to revert back to the traditional fundraising methods in the future.  These types of funding are often for a one-year period and will not be available in future years.  These alternative sources of revenue factor into these disclosures as well.  

As mentioned above, some NFP organizations have received government assistance during COVID-19.  Relief payments issued through the Coronavirus Aid, Relief, and Economic Security (CARES) Act must be accounted for properly in the financial statements.  The Financial Accounting Standards Board (FASB) has released guidance for reporting these payments and auditors must ensure the accounting is correct.  For example, the CARES Act allows some employers to defer the payment of payroll taxes; however, auditors must verify that this deferral is correctly accrued for as a liability in the financial statements.  Testing the criteria for determining how to record any Paycheck Protection Program (PPP) loans is also important as the recording of these loans could be classified as a conditional contribution or a liability.

NFP organizations have areas of fraud risk that are elevated by the coronavirus.  One area of elevated risk is the recording of net assets.  NFP organizations often have restricted net assets on their balance sheets.  These restricted net assets are a heightened area of fraud risk during COVID-19 and should be an area of alert for auditors.  Restricted net assets can only be used in accordance with the conditions set by the donor.  For NFP organizations facing funding shortfalls, it may be tempting to recognize the restricted funds before performing the conditions set by the donor.  NFP organizations are also receiving and sending funds via wire transfer more during COVID-19.  The use of wire transfers is an area of increased fraud risk and should be tested, especially if the NFP organization has not relied on wire transfers as much in the past.