5 Audit Mistakes That Could Be Costing Your Nonprofit

An IRS penalty. A lost grant. A donor who walks away. These are the real costs of a poorly managed audit, and they're more common than you'd think.

But audits don't have to be something you dread. When approached correctly, audits can be one of your strongest tools for establishing donor trust and demonstrating financial integrity.

In this guide, we’ll explore the most common audit pitfalls and provide solutions to ensure a painless audit season.

Mistake #1: Disorganized Documentation

Gathering important documentation—and keeping it organized—is one of the biggest hurdles nonprofit leaders have to clear come audit season.

Not centralizing your receipts, grant letters, and board minutes or waiting to gather these resources until just a week before the auditors need them exacerbates existing stress and decreases the likelihood of a safe audit.

To prevent this, implement these safeguards:

• Enact a digital filing system with your accounting software
• Make a checklist of all the documents you need and tick them off once you've prepared them
• Employ a bookkeeper or accountant to keep track of all the expenses in the year

For good measure, double-check your audit requirements a month out from the audit.

Mistake #2: Not Honoring Restricted Funds

Treating all revenue the same can result in misappropriating restricted funds (donations with strict conditions your nonprofit must follow to use the money). For example, this could look like an organization using a donor’s restricted gift specified for a youth center to instead pay the main office electricity bill.

Using funds for anything other than their intended purpose will raise a red flag for auditors. This can lead to more serious consequences, like auditors being unable to vouch for your books and weakened donor trust.

To guard against misuse:

• Implement fund accounting in your accounting system
• Create and use clear coding processes for restricted funds
• Document donor intent or check the donor agreement immediately upon receiving the gift
• Review and reconcile restricted fund balances and use regularly
• Build internal review processes

To hold your organization more accountable, send regular updates to the donor about the progress of their restricted funds. Let them know if you’ve used the funds already, or if not, when you can use them for their intended purpose.

Mistake #3: Relying on Only One Staff Member

Many nonprofits operate with a lean back-office staff, which can lead to having only one person handling everything—from opening the mail, depositing the checks, recording the entry, and reconciling the bank statement.

This can be a problem because if that staff member accidentally commits fraud, there’s nobody to check them or mitigate the damage. If your nonprofit can’t hire more help, consider:

• Having board members pitch in. For instance, they could review and sign off on bank reconciliations, open incoming mail, or approve and post transactions.
• Hiring a fractional CFO. This professional can step in to design and oversee your internal control structure, ensuring there’s an independent set of eyes on your finances without the cost of a full-time executive.

Remember that your organization is made up of a dedicated team, and nobody should feel like they have to handle everything on their own. Just ensure that whoever you bring on board has the right training to ensure their work meets your quality standards.

Mistake #4: Ignoring In-Kind Contributions

Noncash contributions like goods (food, clothes, medical supplies, etc.), services (e.g., graphic design services, or photography), or expertise (pro-bono legal work, tax advice, or strategic planning) are sometimes overlooked when recording donations. According to Chazin & Company, by not reporting these contributions, you risk underreporting your nonprofit’s scale and impact.

In-kind donations are meant to be reported at fair market value and could be flagged if not documented correctly.

To properly report on these kinds of gifts:

• Create a simple log for in-kind gifts in your accounting software
• Use software to keep track of contributions
• Build an in-kind donation policy to prevent getting donations that are irrelevant to your organization or items that are already opened

It’s best practice to log the in-kind gifts as soon as possible. Leaving this task to the last minute will only add unnecessary stress, and some of the donations will have been used by then, so you could lose track of what to log.

Mistake #5: Lack of Board Oversight

Your Board of Directors (BOD) treating the audit as “the treasurer’s job” and only spending a few minutes reviewing the final report could open your nonprofit up to scrutiny. If the auditor doesn’t think that your BOD is engaged, they might consider your nonprofit a high-risk.

Establishing a dedicated audit committee on your BOD will alleviate this concern and create another layer of checks and balances. Ask your financially-savvy board members to chip in a few hours a week to review audit reports and financial statements ahead of an upcoming audit. Just ensure your staff works closely with the BOD and informs them of everything they might need to know.

Conclusion

The audit process doesn’t have to be daunting. In fact, it brings transparency and accountability to your organization, which reinforces public and donor trust, strengthens your operations, and makes securing an auditor for the following year easier.

The biggest audit improvement you can make is to start earlier, ideally 60 to 90 days before your fiscal year-end. That gives you enough time to gather documentation, reconcile restricted funds, and surface any issues before they become findings.

If you need assistance with the audit process, you don’t have to do it alone. You can seek the help of a nonprofit financial consultant, who can help identify gaps, pull documents together, and give you another set of eyes.