By Jennifer Coleman, CPA CFE
Financial statements are a vital communication tool for a nonprofit organization. They may not have the emotional pull of a beneficiary’s personal testimony, but a not-for-profit’s financial reports can be scrutinized by grantors, donors, charity watchdogs, and regulatory agencies. These columns of numbers demonstrate not just income and expenses, but an organization’s financial health and spending priorities. The last thing you want your organization’s financial reports to communicate is inconsistent recordkeeping, inaccuracies, or weak internal controls.
Errors in financial reports are most often unintentional. Yet they still harm an organization. Unfortunately, the error rate for small nonprofits is higher than that of larger organizations, according to a 2015 University of Notre Dame study.
The mistakes can be as simple as incorrectly aligned data or a simple math error in the report itself. However, some are more complicated and require going back to the nonprofit’s records to remedy. Should the supporting data be inaccurate or unavailable, it’s a sign that there may be an issue with the organization’s operations or internal controls. Below are 21 issues that arise on financial reports that should be addressed in both the report and the organization’s financial management.
Four Financial Statements to Know
First, it’s important to know which financial statements we are addressing. There are four main financial statements every nonprofit should produce.
The Statement of Financial Position is similar to a balance sheet for a for-profit company. It’s divided into assets and liabilities for a specified period. Assets include cash and cash equivalents, receivables such as grants, gift cards, and pledges. Liabilities include accounts payable and debts. Contributions are reported as either with donor restrictions or without donor restrictions.
The Statement of Activities is similar to an income statement for a for-profit company. It reflects the changes to an organization’s net assets resulting from income and expenses during the period, usually a fiscal year.
The Statement of Functional Expenses lists the nonprofit’s expenses by function, such as program, administrative, and fundraising expenses.
The Statement of Cash Flow provides an overview of cash coming in and going out during a given period. Usually, the cash flow will be demarcated as operating activities, investing activities, or financing activities.
Watch Out for Theses Top Errors
It can be tempting for a nonprofit board to focus on the income and expenses on financial statements. However, as the list above demonstrates, there are many details that are worth examining. Errors like those listed above can misrepresent an organization and its activities or, worse, demonstrate weak financial controls. Don’t let these common mistakes trip up your organization and its reports.
Jennifer Coleman, CPA, CFE is the assurance and quality control partner of Myers, Brettholtz & Company, PA. She is a member of the American Institute of Certified Public Accountants, the Florida Institute of Certified Public Accountants and the Association of Certified Fraud Examiners.