While COVID-19 has cast a cloud of uncertainty over not-for-profit organizations, there is one fact we can all hang our hats on: How we audit a not-for-profit now should look completely different than it did a year ago, a month ago, or even a few weeks ago.
As auditors, we’ve been fortunate to work in a stable environment for some time. The pandemic, however, has pulled the rug out from underneath all of us – and that includes our clients. Not-for-profits are not exempt, and COVID-19 has affected each one in drastically different ways.
How do you consider the economic fallout of COVID-19 when auditing a not-for-profit? First, you must be as close to your client as possible. This starts with a conversation about COVID-19. While this may sound obvious, you can’t overstate its importance. By talking through the challenges your client has endured because of COVID-19 and how they’ve adjusted to the pandemic, you’ll get a better handle on the risks you might encounter during the audit.
Here are a few more considerations to keep in mind.
- Assets and liabilities
Make sure you have a clear insight into the not-for-profit’s asset impairments (if any) and inventory valuation. If your client has a large investment portfolio, such as an endowment, it may be underwater, especially if they’ve invested in certain alternative investments. You may need to adjust estimates as well. For example, if the not-for-profit depends on pledges, the percentage of uncollectable pledges may rise. Or, they may be collected at a different time than what was projected. Debt modifications and loan covenants are also important to think about.
- Revenue and expenses
The not-for-profit’s revenue stream is another consideration. There is an influx of funding for some not-for-profits because their services are in high demand. For example, more grants and food donations are coming in for many food banks to meet increased demand, and other not-for-profits have solicited specific COVID-19 donations. Other not-for-profits must contend with less money from fewer donors than in recent years. If your client had to cancel its fundraising events, this will also affect cash flow.
Your client may also be incurring different expenditures that it never had before. For example, your client may have costs associated with remote working, costs associated with event cancellations and/or additional costs to comply with CDC guidelines for sanitation and other protocols. Not-for-profit higher education institutions may have new costs associated with converting in-person classes to online classes. You’ll need to understand how those new costs are classified in the not-for-profit’s financial statements.
- Internal control
Finally, you should remember that the not-for-profit’s internal controls probably aren’t where they were a year ago. More remote workers, fewer employees and other factors have more than likely disrupted the organization’s processes. You’ll need to understand how internal controls have changed since the pandemic began, learn how controls are being implemented now and be aware of the increased risk of fraud in the world today. Even if you’re new to auditing in a remote environment, stay vigilant and scrutinize the evidence. The way you’re conducting the audit may have changed, but the standards all of us must adhere to have not.
We may have more questions than answers as the pandemic continues to unfold. Fortunately, there are plenty of resources available to help us along the way. And, until the pandemic winds down, let’s give not-for-profit clients one other constant besides change: A commitment to helping them through these unprecedented times.
Chris Stanz, CPA, Managing Principal, National Assurance; CLA (CliftonLarsonAllen LLP) Chris oversees CLA’s national assurance technical group and service assurance leaders and is responsible for several aspects of A&A quality control. She has over 25 years of experience with the firm and has provided auditing and consulting services to a variety of clients with a focus on not-for-profit and affordable housing organizations as well as single audits.