One of the key responsibilities of a board is to monitor the nonprofit’s finances and guide the organization toward long-term stability. While it can be difficult to course-correct once financial trouble sets in, recognizing early risk indicators can make the difference between a small setback and a serious crisis. By partnering with a trusted nonprofit audit service, your organization can identify and address these risk indicators early—strengthening oversight, preventing missteps, and safeguarding lasting success.
Budget Troubles
While it is to be expected that there is some variation in actual costs and the budget, significant or consistent discrepancies should be viewed with caution. It is important to first ensure that the budget your nonprofit creates is reasonable and compatible with the agreed upon strategies for operation and development. If this is in place and there are still deviations, consult with your management team regarding common budgetary challenges, such as funding changes or macroeconomic factors that impact spending and funding. It may be necessary to encourage management to identify areas where they can enact cost-saving measures. It is important to steer them away from typical budgetary pitfalls such as syphoning money from one program to fund another, misusing operational reserves or endowments, or taking out unplanned loans. These sorts of responses to budget troubles can have negative impacts in the years to come.
Errors in Financial Statements – Risk Indicators
In order to ensure transparency and accountability, it is essential that financial statements are submitted on time and in a standard format using U.S. Generally Accepted Accounting Principles (GAAP). These conventions allow the board and management to make informed decisions and to foster trust in the larger community, including when trying to obtain funding or financing. As a board member overseeing the finances of your nonprofit, it can be helpful to form an audit committee, and ask that your management team submit professionally prepared statements and participate in annual audits. In order to streamline audits, management should provide financial statements to the board one month before the close of the fiscal period and the audit committee should open direct lines of communication with the auditors throughout the process. Once the audit report is complete, the committee can prepare the whole board to review and discuss its findings. If your nonprofit management team struggles to engage in this process, it could be a sign of poor internal controls, understaffing, a lack of knowledge of GAAP, or larger problems they are attempting to obfuscate.
Community Loss of Confidence
Nonprofits rely on their good name in the community and the trust of their supporters and donors. If the reputation of your nonprofit begins to wane, that is a powerful indicator it is time to dig deeper. Ask supporters what they’re seeing or hearing that prompts their concerns. And if you observe the development staff contacting donors outside of the usual fundraising cycle, that could indicate the organization is experiencing financial distress.
Overzealous Executive
While the CEO may helm the ship, there are some executive decisions that should be considered an overreach if they are not conducted with the knowledge and approval of the board. If your executive director attempts to choose a new auditor, add board members, ignore expense limits, or make strategic decisions without board input or guidance, there is a risk there are financial issues that warrant the board’s attention. And while these signs, like the other indicators above, don’t necessarily mean there is significant financial disorder, they can let you know to take a closer look and possibly implement some actionable changes before a more dire situation presents itself.
Ernst Wintter & Associates LLP specialize in California non-profit audits and tax preparation. Contact us today for help with your non-profit audit or tax prep needs.
