Even if your not-for-profit isn’t legally required to obtain independent audits, such audits can enhance financial transparency, increase accountability and help you build trust with your stakeholders. But how do you find a truly independent auditor? Ensuring independence requires more than hiring an outside firm. The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct can help guide you.

On the face of things

The AICPA code mandates that CPAs and their firms be independent in the performance of professional services, including audits. It requires independence in both fact and appearance. Independence in appearance calls for avoiding circumstances that would cause a third party to reasonably conclude that the auditor’s integrity, objectivity or professional skepticism is compromised.

The totality of the circumstances matters when assessing independence in appearance. Insignificant individual threats (for example, an auditor’s small contributions to a charity) can become an issue in the aggregate if other ostensibly minor threats are also in place.

When independence is threatened

The code identifies several examples of threats to independence that could arise during a nonprofit audit — and when the threat may be acceptable. An acceptable threat generally is one where a reasonable and informed third party would conclude that the threat doesn’t impair independence.

An example of a threat that could impair an auditor’s independence is advocacy. This happens if an auditor promotes the nonprofit’s client’s interests to the point of compromising the auditor’s objectivity. This could happen, for example, if an organization is pursuing a cure for an illness that afflicts an auditor’s family member.

“Familiarity” is another potential stumbling block. Be careful if a close friend or relative of the auditor holds a key position in your nonprofit. The auditor may be too close to this situation. An auditor who serves as a director or officer or who designs, implements or maintains the organization’s internal controls is also too close.

Additionally, avoid hiring someone from a firm that has previously performed nonaudit work for your organization — for example, if the firm has prepared your nonprofit’s financial statements or served as its accountant. Know, too, that auditors are required to excuse themselves if they face threats or pressures from anyone in your organization.

Other safeguards

An auditor’s firm, a professional organization or regulators can impose other safeguards, including:

• Education requirements,
• The potential for disciplinary action,
• External review of a firm’s quality control system, and
• Licensure requirements.

The AICPA code says that audit clients can implement safeguards that operate in combination with other safeguards. Your nonprofit could, for example, have an active audit committee that monitors decision-making, oversight and communications related to any independent auditor.

An auditor can implement safeguards, too, such as using different partners or engagement teams from separate offices. The auditor must document the identified threats and the safeguards applied.

Time and money

With limited time and money, your nonprofit likely wants to simplify the auditor selection process. But don’t let speed and financial constraints get in the way of hiring the right independent auditor. Contact us for suggestions.

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Should your not-for-profit apply for a loan? Perhaps you want to buy new equipment or build an extension to an existing facility. Maybe your nonprofit generates revenue unevenly or you need help to recover from a financial blow.

For-profit companies often borrow extensively to grow, but they also generally produce reliable cash flow with which to repay debts. Loans to nonprofits can be riskier for both the lender and the borrower. Before your organization commits to applying for a loan, anticipate lender scrutiny and perform careful due diligence.

Cons and pros

The primary drawback to any loan is that you must pay it back. And, of course, you’ll have to pay interest. Rates for nonprofit loans tend to be higher than those for businesses because nonprofits often pose greater risk. Also, other expenses associated with loans (for example, appraisal charges, closing costs and attorneys’ fees) can add up quickly. And your nonprofit may be required to make a significant down payment.

However, once you’re approved for a loan from a reputable lender, you know you’ll get the funds. Also, applying for a loan may require less time and effort than fundraising, wooing major donors or seeking grants.

Loan options

Your funding needs and financial situation will help dictate the type of loan you should apply for. Common options include:

Lines of credit. Does your nonprofit typically experience revenue peaks and dips throughout the year? This can lead to cash flow crunches. In such situations, a revolving line of credit may be suitable.

Bridge loans. Sometimes cash flow issues can arise less predictably. A previously reliable funding source might dry up or a natural disaster could hit when cash reserves are low. In such circumstances, consider a bridge loan, which typically lasts no longer than one year.

Long-term loans. Standard loans with extended repayment schedules can be an option for major purchases or projects. You may want to finance a project with a capital campaign. However, campaigns can take longer than anticipated. A long-term loan can help you avoid delays while you continue fundraising.

Sometimes, nonprofits encounter opportunities that require prompt action — for example, office space you’ve had your eye on suddenly becomes available or you want to merge with a mission-similar organization. Both bridge loans and long-term loans may prove useful to finance such opportunities.

Preparing your application

Once you determine your financing needs, you’ll need to apply for the loan. Lenders generally ask about plans for any loan proceeds. They’ll require you to provide:

• Several years of tax filings and audited financial statements,
• Reports of pledges, receivables, accounts payable and outstanding debt,
• A description of major funding sources, and
• A board resolution approving the loan.

You may also need to submit information about your organization’s history (including articles of incorporation and bylaws), management and board of directors, short- and long-term strategic plans, and programs. Lenders often ask for cash flow projections showing a repayment plan as well.

A demanding process

Obtaining a loan can be a long and demanding process, and some nonprofits simply won’t qualify. Higher interest rates also mean borrowing can be expensive, particularly if your lender considers your organization a risky bet. Contact us for help applying for loans and to discuss other, potentially more accessible, financing options.

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Even not-for-profits that make realistic budgets and hold adequate funds in reserve to cover shortfalls can run into financial emergencies — particularly if they lose a major funding source. But if your organization has an endowment, its income may be able to help ease cash-flow issues, even long-term ones.

Restrictions and guidance

Several factors determine whether you’ll be able to cover budget shortfalls with your endowment. These include investment performance, inflation and your endowment’s spending policy. First and foremost, you can’t spend income from restricted funds for just any purpose. So make sure the endowment funds you’re looking at are “self-generated” or unrestricted.

In addition, your endowment’s spending policy must conform to provisions of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA), if enacted by your state (most but not all states have enacted it). UPMIFA provides guidance about making prudent investment decisions and delegating investment management. For example, your nonprofit shouldn’t spend more than 7% of its endowment in any one year. In general, the portion you can spend includes investment appreciation, realized gains, interest and dividends.

Spending policy

Your endowment spending policy should define how much of the fund’s income can be spent on operations each year. It doesn’t, however, have to define how that money can be spent within operations.

For most nonprofits, spendable resources are defined as a percentage of a rolling average of their endowment investments (typically averaged over three to five years). This method helps even out the volatility of investment returns and prevents the endowment’s contribution to any one budget year from being significantly lower than contributions to other years. In most cases, the spendable percentage is between 4% and 7% — less when investment markets are depressed.

This approach may help smooth cash flow currently available to operations, but it doesn’t address whether the endowment fund will be able to maintain a similar level of funding for future operations. Also, because investment returns usually don’t correspond to the inflation rates that affect your operating budget, your spending policy should be based on more than recent returns.

Effect of inflation

To factor inflation into your endowment spending policy, you may wish to start with a relatively conservative, inflation-free investment rate of return. Then adjust it for inflation to arrive at a spending rate you can apply on a year-by-year basis. For example, if you determine that an inflation-free rate of return should be 3%, and the inflation rate appropriate to your sector is 2.5%, your effective spending rate to apply to your asset base would be 5.5% for that year.

It’s also important to keep a spending rate policy that isn’t directly linked to fluctuating investment rates of return. In other words, don’t allow your withdrawals from your endowment to go up just because investment growth on those funds has spiked.

Be reasonable

A reasonable endowment spending policy should preserve your principal and enable it to grow and produce income years into the future. If it doesn’t, you’re probably spending too much and need to adjust your policy. You may also need to find other funding sources to meet current operational needs. Contact us for help with your financial analysis.

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Whether you’re planning an off-site retreat for board members, a luncheon for potential corporate funders or a formal fundraiser, you likely will encounter opportunities to cut expenses. Although no one wants a meeting or event to look “cheap,” most of your nonprofit’s stakeholders will appreciate attention paid to thrift. How can you reduce costs yet still arrange gatherings that will impress attendees and strengthen their bonds with your organization?

Food and beverages

As you work with caterers or your event space’s restaurant, make smart meal choices. Buffets, such as salad, meat carving or pasta stations usually are less expensive to staff than individually served meals with multiple courses. Boxed lunches are an even more budget-conscious choice, though they’re inappropriate for more formal events.

When providing drinks for meetings, skip the bottled water and offer pitchers of good old tap water. It’s cheaper and more environmentally friendly. And consider limiting alcoholic beverages at events to a few choices — such as one brand of beer, one red wine and one white wine. Open bars can be extremely expensive, and your supporters will likely understand if you charge them for any alcoholic drinks.

Contract items and labor

Consider contract line items to be open to negotiation. You won’t win every battle, but few venues or vendors have the heart to say no to every request from a nonprofit. Seeking bids from more than one vendor gives you leverage, so consider getting several. For one-time events, book as early as possible to get the best pricing. For regular events such as quarterly board meetings, consider using the same vendor and requesting volume pricing.

Another way to cut expenses is to use your own or an outside vendor’s audio-visual equipment. For example, a hotel may offer projectors, wireless microphones and sound systems, but the cost to rent them for a meeting is probably higher than an outside vendor would charge.

Also pay attention to labor costs. If your event requires extensive setup, arrange schedules so that staffers (yours and the venue’s) work during normal business hours and don’t incur overtime. This is a good opportunity to engage your volunteer workforce.

Special events

In a time when many meetings and even fundraisers are conducted digitally, in-person events should be special. Just don’t confuse “special” with “expensive.” If you try to cut costs but an event still looks like it’s going to be a budget-buster, think about soliciting donations from supporters and asking sponsors to help defray costs. Contact us for more suggestions.

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It may be tempting to try to save money and perform your nonprofit’s accounting tasks internally. But if your staff isn’t experienced and properly trained, mistakes are likely to occur — with potentially serious repercussions. Some accounting mistakes are common among newer nonprofits and smaller organizations that attempt to go it alone. In particular, work to prevent:

1. A laissez-faire attitude toward rules. Even the smallest nonprofit should establish formal, documented and detailed procedures for managing bookkeeping and accounting tasks. Your process needs to address all aspects of managing money, including the proper way to accept, document and deposit donations, pay bills, and handle every step in between. Put your procedures in writing and ensure staffers follow each step, every time. This helps minimize the chances of skipping something important and makes it possible to have cross-trained employees fill in for those who regularly perform specific accounting activities.

2. Data entry mistakes. It’s easy to wreak havoc on your accounts by entering a $500 payment as $50 or transposing numbers, so require employees to check and double-check every single entry. Also, reconcile accounts against bank statements immediately, and don’t overlook even the smallest discrepancy. Little errors don’t go away; they just become bigger problems.

3. Budget-free decision making. You can’t control overspending or invest a surplus if you don’t know they exist. That’s why budgets are important. They offer a baseline. Budgets don’t have to be intricate to be useful. Just look at a few months’ worth of bills and deposits to set a starting point. Then refine your plan as you go along. Include a “miscellaneous” category, but don’t allow it to account for the majority of your expenses.

4. Disorganization. Properly store and file documents such as receipts, invoices and bank statements so you can easily find them when you need to create reports, generate financial statements and complete your IRS Form 990. Establish file naming conventions and secure storage locations and mandate a daily or weekly filing schedule for all accounting paperwork.

For most organizations, it’s best to have qualified accounting professionals handle such tasks as payroll, accounts payable/receivable, financial statements and tax compliance. If you have the expertise on staff, great! If not, consider outsourcing these critical tasks. Contact us for more information.

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