Auditor recommendations can be a treasure trove
Nonprofit leaders typically pay a lot of attention to the auditors’ findings after an annual audit, and correct any “deficiencies” or “weaknesses” in internal controls. But the auditor’s recommendations — formerly the “management letter” — provided in the report also can provide a gold mine of information.
Segregation of duties
Better segregation of staff duties is a common auditor recommendation, especially in small organizations. One recent audit, for example, discovered that the nonprofit’s office manager makes bank deposits, reconciles bank statements and mails vendor payment checks. He also has check-signing authority for purchases under $500, and posts all cash receipts and disbursements to the general ledger.
Giving one person, no matter how honorable, all of these duties is a recipe for fraud or error. The idea behind segregation of duties is to avoid putting an employee in a position where he or she could both perpetrate and conceal fraudulent acts, or make mistakes that go undetected.
In this case, the auditor’s recommendations included directly mailing the monthly bank statements (with images of the cleared checks) to the executive director or treasurer, who would then open and review them before giving them to the office manager. Another alternative is to offer those with oversight responsibilities “read only” access for on-line banking records.
Documentation of internal controls
Sometimes an audit might reveal that an organization has adequate internal controls, including various checks and balances. However, documentation of these controls may not be up to speed.
For example, a recent audit of a government-funded nonprofit revealed that it wasn’t properly documenting its authorization of expenditures. The auditors recommended, among other measures, that the managers sign off on monthly bank reconciliations. Such steps not only might garner better results in the next annual audit, but also better prepare the organization for a site audit by its government funding sources.