More than one-third of non-profit organizations are audited multiple times per year. Many of them can spend up to a month preparing for each audit. These organizations spend a lot of time, energy, and money dealing with the fear of audits, because an audit that goes south can mean lost funding, lawsuits, and even the future of the organization.
If you're facing multiple audits in a year, it may be because your funding agencies saw red flags that made them nervous about how their funds were being used.
With the right approach on the front end, you can confidently enter an audit and avoid potential lawsuits. Let's look at four key audit threats for non-profit organizations — and how you can solve them.
Handpicked related content: 3 Tips to Protect Your Grant Funding and Avoid an Audit
1) Timesheets for Hourly & Salaried Employees
While most nonprofits have salaried employees, many hire hourly workers, making them subject to FLSA overtime rules. With the recent overtime changes that just went into effect, you need to be on top of your overtime policies and practices (unless you raise employees' wages above the new salary threshold). Everyone knows a DOL audit can be traumatic for your organization.
Besides tracking overtime, many funding sources want to know they aren't bearing the full overtime burden just because an employee was working on their particular grant when they exceeded 40 hours. Make sure your time system can distribute overtime proportionately to grants, so that you're paying employees correctly AND allocating the OT earnings to the right grants.
To prove compliance and be ready for an audit, keep track of your salaried employees' time spent across grants or programs. Even if you already have a basic time-and-attendance system to track hours, you'll need a more powerful solution that can allocate actual time to specific grants so the financials and funding reports are correct.
2) Restricted Funds
If you're running under restricted funds, you have to prove that you're using them for a particular purpose or project. And you have to be especially careful to track your grants if you have government contracts. Every penny needs to be accounted for — estimates and round numbers won't cut it.
Because funding sources may perform scheduled or unscheduled audits to ensure compliance, you need to be ready at a moment's notice. The spectre of a potential audit is always looming over a non-profit organization's head.
Discover more: Your Funding Reports Could Get You Audited
3) Charging Costs to Grants
Your non-profit organization may have allowable and unallowable costs to deal with. In general, a cost is allowable if it's used for work activities that are necessary for producing the outcomes described in the agreement — for example, labor costs for the grant/program/contract. Award guidelines specify what percentage of these costs can be charged to a particular grant, program, or contract.
On top of that, there are direct costs and indirect costs. Direct costs are the activities or items that are associated entirely with the grant, such as salaries, benefits, and items like project materials.
Indirect costs are associated with running the organization as a whole, such as administrative staff salaries, rent, utilities, and office supplies. Award guidelines specify how much, if any, percentage of these costs can be charged to a particular grant.
When you charge your costs to grants, your funding sources expect to see complete clarity. How was every dime spent, and did it go to appropriate costs? For most non-profits, it's a painstaking manual process of tracking every receipt, entering item by item into spreadsheets, and maintaining the spreadsheets with extreme care. Mistakes are easy to make, and chasing the paper trail can steal valuable time away from your core work.
4) Outcomes Tracking
To show funders that you're meeting your goals, you often need to measure outcomes. This helps to forecast future funds needed to accomplish further goals. Under-spending an award can be just as problematic as being over-budget. If you use less money than planned to produce an outcome, you may not receive the same amount in the next award period.
It's critical for your organization to know exactly how much you're spending toward your outcomes, throughout the lifetime of the project. This empowers you to stay on target and avoid unpleasant surprises at the end of the award period.
Most accounting systems only take into account all operating expenses, without breaking them out by funds. Some organizations compensate by using spreadsheets to keep track of all costs across grants, using fixed allocations through their time-and-attendance system, and pulling together data from separate time, payroll, or accounting systems. It's an unreliable, painful, and time-consuming process to manage.
Stop Sweating Your Audits
That's a lot of accountabilities day-in and day-out — and they multiply with every additional fund you're awarded. No wonder grant managers are under constant stress!
But you can eliminate a lot of that stress and potentially reduce your audits each year. IDI's grant budgeting and management tool is unique among grant tracking software. Unlike other tools, GrantAlytics is the only solution fully integrated with your time & payroll modules.
The dashboard gives you real-time visibility into the status of each of your funds' labor and non-labor expenses — so you can make better spending decisions that are easily justified.
Enter every audit confidently, knowing that you can account for every penny of your grants to each funding source. See how GrantAlytics can help your non-profit organization.