Preparing for Your Audit— What’s Your GAAP Gap?
Joan M. Renner, CPA, CGMA, Director, 501(c)(fit!)
A number of our 501(c)(fit!) participants say they’d like to learn more about preparing for their audit, especially those whose organizations have not navigated an audit before. Proactive nonprofit leaders want to do what they can to achieve favorable audit results for their organizations.
So why do I hesitate before answering this question? Because it reminds me of Marisa Tomei’s line in My Cousin Vinny. As she confidently explains, “It’s a trick question.” Let me try to explain why.
There are really two components to promoting a positive audit experience. The first one is audit dynamics; choosing the right auditor and setting expectations for a timeline and communication. There can be an expectation gap between the things that are important to you, and the things that are required by generally accepted auditing standards. Addressing this expectation gap by agreeing on your expectations up front is the first part of successfully navigating the audit process.
The second component is to address your GAAP gap. What’s that? Your GAAP gap is the difference between the condition of your books before the audit, and the perfection required by generally accepted accounting principles (GAAP). Auditing standards presume that your books are on the accrual basis, that your books are complete, accurate and adjusted in accordance with all of the complex areas of GAAP. To the extent your books fall short of this standard, you have a GAAP gap.
The GAAP gap is the root of many audit headaches. If your books need adjusting, you may experience audit delays, additional work and less than favorable findings. So addressing your GAAP gap is key to promoting a positive audit experience.
The challenge is that a small nonprofit usually doesn’t have extra staff, just sitting around waiting to prepare for the audit. In addition, a small nonprofit usually doesn’t have a GAAP expert on staff. Few smaller nonprofits have the funds to maintain double-barreled accounting year-round. Having some GAAP gap is normal.
This is why, when nonprofit leaders ask how to prepare for their audit, I say it’s a trick question. If you don’t have the time and expertise to achieve accounting perfection during the year, why would you suddenly expect to be able to do it at year end? Let’s be realistic. You probably need to bring in someone at least once a year to fill your GAAP gap.
The actual process of preparing for the audit is a hands-on job that really centers around controllership. To get you ready for your audit, the controller will review your accounts for accuracy and compare your books to outside expectations for completeness. The controller will adjust for accruals and deferrals and review your application of the more complex areas of GAAP such as income recognition and leases. The controller will prepare workpapers to show the auditors why your accounts are right. In the meantime, you can be doing something more productive, like working on next year’s budget.
What can we learn?
Consider whether preparing for your audit on your own is a realistic expectation given the available time and GAAP expertise you have on staff. Consider your options for bringing in some outsourced controllership at least at year end.
Learn more about promoting a positive audit experience in our on-demand webinar, Acing Your Audit— Managing your audit from start to finish. Just so you know, our one-hour on-demand webinars offer timely information, accessible on your schedule, for one year, for a really low price.
Learn more about “the expectation gap” and other common audit headaches and remedies in our June 27, 2017 FIT! TIP, Notes from the Audit Clinic; Great Expectations.
There’s a difference between a bookkeeper and a controller, just like the difference between a kitchen helper and a chef. Learn more about the concept of controllership in our April 3, 2017 FIT! TIP, Nonprofit Finance is a Piece of Cake.
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