On September 22, more than 200 people joined CPA Gregg Bossen and ApprovalMax for a webinar on what auditors look for in a nonprofit's books. People asked more questions than we had time to answer, so we've answered them here.
Gregg runs an accounting firm - QuickBooks Made Easy for Nonprofits - that works only with nonprofits, and he prepares around 200 Form 990s and 40 audits a year. Here he answers the questions about audits and good practice, while the ApprovalMax team answers the questions about approvals in QuickBooks Online.
When Gregg audits a nonprofit, he picks around 60 expenses and checks each one for two things. The first is a copy of the receipt or bill. The second is proof that someone approved the payment, ideally someone other than the person who paid it.
If a nonprofit has a reliable approval process, he can test fewer expenses, sometimes around 20 instead of 60. That means less work for the auditor, which can mean a lower audit fee.
Not necessarily. Gregg explained that a nonprofit can still get a clean audit opinion without a formal approval process. But the auditor will usually note it as a weakness in the management letter, which is the letter of recommendations they send after the audit.
It matters more if you spend more than $1 million of federal money in a year. At that level you need a single audit, which is a more detailed audit required by the federal government. If the auditor finds a serious gap in your approval process, they have to report it to the funder, and that can affect your future funding.
Gregg's advice was not to delay an audit because you're worried about your controls. If a funder needs an audit, get one, and use the auditor's recommendations to improve.
When the board approves the treasurer's reports, that shows the board has seen the overall figures. It doesn't show that each payment was approved before it was made.
Gregg said the most common problem in small nonprofits is one person handling everything. The answer is to bring in a second person. If you use an outside bookkeeper who enters the bills, and someone at the nonprofit approves them before payment, that already gives you two people involved. If the executive director is the only employee, a board member should approve payments before they go out, and check that each one is recorded against the right account.
Keep the approval with the bill, so you can show it to an auditor later.
Yes. For small, unplanned costs like parking, set the rules in advance in a written expense policy. The policy says what staff can spend without asking first, and up to what amount. The approval then happens when the person claims the money back, or when someone reviews the card statement.
What an auditor wants to see is that someone other than the person who spent the money reviewed and approved it, and a record of when that happened.
A compilation is a basic report where an outside accountant puts your financial statements together from your own records, without testing whether the figures are correct.
Gregg said an auditor or reviewer should never change your transactions. A firm doing a compilation sometimes does, because it may also be acting as your bookkeeper. Gregg has done this himself, but he always speaks to the client first. If changes were made without anyone telling you, that's a problem, and you should ask the firm to explain every change.
Gregg recommends staying with the same auditor for about five years. It takes time for an auditor to understand your organization, and audits usually run more smoothly after the first year. So he advises against changing after a single year unless the auditor is very poor.
After about five years, it's reasonable to consider a new firm. A long relationship can make it harder for the auditor to stay objective, and a new firm brings a fresh set of eyes.
In-kind expenses are goods donated to you instead of cash. Gregg said they should go across your normal expense categories, not on a single line. For example, donated travel goes on the travel line, and donated office space goes on the occupancy line. You shouldn't have an expense account called "in-kind". He also noted that donated services should not go on the Form 990 at all.
Yes. QuickBooks Online Advanced includes a basic approval tool. ApprovalMax is a separate app that connects to QuickBooks Online. It lets you set approval rules that follow your own policy, such as sending any bill over a set amount to a second approver.
Once a bill is fully approved in ApprovalMax, it's sent to QuickBooks Online with a PDF attached. The PDF shows the full approval history, including who approved the bill and when. Anyone looking at the bill in QuickBooks can open it.
Auditors can also be given their own login to ApprovalMax. There, they can see every approved bill and purchase order in one place and run an audit report, without searching through QuickBooks one transaction at a time.
You can, and some people in the chat said that's what they do. It works as long as nobody forgets to attach the email.
The difficulty comes later. Finding one email approval from several months ago is slow, even with good folders. And an email thread with a lot of back-and-forth can make it hard to show clearly who approved what. With approval software, the record is created as part of approving the bill, so nobody has to remember an extra step.
They do different jobs. DocuSign collects signatures on a document. Approval software sends each bill or purchase to the right people based on your rules. It then records the approval against that transaction in your accounting system.
Gregg confirmed in the session that if a grantor's desk audit can't see the approval, you will lose points.
In ApprovalMax, the approval history PDF is attached to the bill in QuickBooks Online, so the approval sits alongside the invoice. You can also download it to send to a grantor.
Yes. A restricted grant is money that a funder says can only be spent on certain things. In ApprovalMax, you can set approval rules based on the class, account or project a bill is coded to. For example, bills coded to a restricted grant can go to your grant manager for approval. Anyone reviewing the grant can then see every step taken to approve the payment.
No. People can request and approve in ApprovalMax without a QuickBooks license. This keeps the number of people with access to your books small, while every approval is still recorded.
In QuickBooks Online, card holders can email receipts in. But someone with QuickBooks access still has to categorize and accept each one.
It depends on how detailed your approval rules need to be. Many tools handle one or two approval steps well. ApprovalMax is built for more detailed rules, such as sending bills to different approvers depending on the amount, account, class or project. It also includes auditor access and a full audit report.
If each bill is approved before it's paid, the treasurer can confirm that an approval exists for each payment. They won't need to track down unapproved payments after the money has gone. Card spending would still need a monthly review against receipts.
You can book a demo with the ApprovalMax team or start a free 14-day trial connected to your own QuickBooks Online file. ApprovalMax also offers a discount for nonprofits.
Gregg Bossen teaches a three-day QuickBooks Online course for nonprofits, running November 10 to 12. Webinar attendees can get $40 off with the code APPMAX40.
See Gregg's course