by Sarah Gregory, CPA, CFE, director, Alerding CPA Group
With COVID-19 having an unprecedented impact on the operations of nonprofit organizations, it’s critical, as a nonprofit leader, financial/accounting professional, auditor or board member, to consider the impact it may have on your year-end financial reporting for 2020.
As your team closes out its financial records for 2020, make sure you take into account the following key accounting and auditing considerations prior to your financial reporting engagement:
- Determine options for remote auditing. While access to records may be limited, auditors will still need to gain access to certain records. Ensure that your financial team takes the necessary steps to accommodate remote auditing. Prepare for this type of engagement by reviewing various remote options beforehand.
- Assess existing internal controls and segregation of duties over financial reporting. It’s likely they may have been impacted during the year due to staff absences or reductions.
- Analyze your organization’s risk for fraud. Your vulnerability to fraud risk may be heightened as a result of the current environment for added incentive or pressure to perpetrate fraud, opportunity to commit fraud, and rationalization to justify a fraudulent action. Examples of risks could include:
- Fictious revenue – creating incentives and opportunities to record revenue that is fictious. An example could be an individual who inflates their sales since their compensation is directly tied to meeting sales targets.
- Improper timing of revenue and expenses – improperly recording revenue and/or expenses in a period in which the revenue was not earned or delaying the expense to a later period in which the services were not performed.
- Federal relief program applications – increased pressure to apply for Paycheck Protection Program funds, including forgiveness due to economic downturn.
4. Prepare for variances in auditing inventory. With COVID-19 disrupting operations, inventory observations may need to be postponed, conducted remotely or performed under different circumstances than prior years.
5. Account for additional disclosures. Be prepared to account for significant financial impacts related to COVID-19. They may require you to include additional disclosures within your financial statements and potential evaluation of going concern issues related to the organizations ability to continue indefinitely and being profitable.
6. Account for delayed ASU. Accounting Standard Update (ASU) 2020-05, Revenue from Contacts with Customers (Topic 606) and Leases (Topic 842): Effective Date for Certain Entities, allowed organizations to delay the effective date these ASU’s for one year. If your organization did not early adopt as of your most recent fiscal year end, you will be required to adopt these ASU 2014-09, Revenue from Contracts with Customers (Topic 606) in the current year. ASU 2016-02, Leases (Topic 842) will be effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022.
7. Identify delayed payments and waived fees. If your organization received relief from creditors and lessors in the form of delayed payments, waived fees, or adjusted amortization schedules, you will need to ensure you are correctly accounting for these modifications or extinguishment of liabilities.
The impact of COVID-19 will continue to be felt for years to come. As you close out your financial records and prepare for your financial reporting services, make sure you include these considerations as part of your process.