When it comes to auditing nonprofit organizations (NFPs), one thing is clear accuracy is non-negotiable. Yet, even seasoned CPAs know how challenging it can be to navigate the complexities of financial reporting standards, especially with recent updates to key accounting regulations. Whether you're new to nonprofit audits or a veteran CPA, understanding and avoiding common financial statement errors is critical. This blog will highlight the most frequent mistakes across various financial statements and share practical insights to strengthen your audit practice.
Financial Statement Errors That Trip Up Nonprofits
Nonprofit financial reporting comes with unique challenges, and errors often arise from misinterpretation or misapplication of standards. Here’s a breakdown of the most common pitfalls across key financial statement types:
1. Statement of Financial Position (Balance Sheet)
Current/Non-current Classifications: Omitting liabilities when a classified statement is used.
Restricted Cash Errors: Failing to disaggregate restricted cash from unrestricted cash properly.
Misclassification of Assets: Examples include cash in a board-designated quasi-endowment being reported as cash equivalents instead of investments.
Lease Reporting Under ASC 842: Not recording right-of-use assets and liabilities for operating or finance leases.
2. Statement of Activities
Net Asset Reporting: Reporting donor-restricted investment income as unrestricted without proper board appropriation.
Revenue Recognition: Recognizing conditional grants or promises to give as revenue before donor-imposed conditions are met.
Expense Misclassification: Improperly allocating expenses between program and supporting services.
3. Statement of Cash Flows
Financing vs. Operating Activities: Misclassifying donor-restricted contributions as operating activities instead of financing activities.
Netting Cash Flows: Combining purchases and sales of investments or property instead of reporting them separately.
4. Statement of Functional Expenses
Inadequate Expense Reporting: Failing to present expenses by both natural and functional classifications in one location.
For a detailed list of common errors and best practices for nonprofit financial reporting, visit AICPA’s Not-for-ProfitResource Center.
Navigating the Updates: Accounting Standards Changes
The financial reporting landscape is constantly evolving, and 2023 brought significant updates for nonprofits, including changes under FASB ASC 842 (Leases) and FASB ASC 958 (Not-for-Profit Entities). Keeping your clients compliant requires a proactive approach to understanding these updates and applying them correctly. Check out this FASB Overview for more details.
Why Peer Review Matters
Mistakes in nonprofit financial statements can lead to reputational damage, donor mistrust, and compliance risks for your clients. Conducting peer reviews is a powerful way to improve your audit quality and ensure your team is consistently meeting professional standards. It’s also an opportunity to identify training needs and refine internal processes.
How BryMar Can Help
At BryMar CPA, we understand the unique challenges of nonprofit auditing. Our peer review services are designed to help CPA firms like yours enhance audit quality, minimize risk, and navigate complex accounting standards. With our specialized focus on nonprofit audits, you can trust us to deliver insights that strengthen your firm’s practices and protect your clients’ interests.
Ready to Elevate Your Attest Practice? Contact BryMar CPA today to learn more about our peer review services. Let’s work together to set the standard for audit excellence.