CMLS Finance Section Council: Finishing A Financial Audit Is Really A Beginning
Thursday, May 25, 2017
Now that the annual audit of the financials is complete, you can take a deep breath, relax your shoulders, and even take one or two of those vacation days. It’s all good — just don’t think the audit is an end to something. Audits are beginnings.
There is always some work to do after an audit is done. Sometimes it’s a little. Sometimes it’s a lot. It depends on the results.
According to the National Council of Nonprofits, which provides some valuable follow-up information that can be applied to the MLS industry, the audit committee, executive director, and senior financial staff that are responsible for reviewing the draft audit report should also ask questions about any findings. Ideally, they will even evaluate any recommendations before the report is presented to the board.
Often, this can be covered in a "letter to management.” This letter, sometimes referred to simply as the "management letter,” serves to identify areas of operations or procedures that the entity may want to improve or redesign.
Since auditors work with a variety of organizations, they are often aware of best practices or, as some prefer to think of them, better practices. These better practices can often provide solutions that can be attached to any findings in the management letter.
Once included, the audit committee or staff will review a draft of the management letter. They will ensure the letter is accurate before the final version goes to the board of directors and enable the committee or staff to provide explanations or updates to any item the board might be concerned about.
According to accounting standards, this includes any "material weaknesses" and significant deficiencies. (SAS Nos. 114, 115) For example, some issues auditors may point out in the management letter typically fall into two categories:
- Material Internal Control Issues. This includes any weaknesses in the processes, systems, and internal procedures that help to ensure that all financial transactions are recorded properly. Strong internal controls (e.g., early detection and correction) serve to highlight errors and irregularities in financial operations. Correcting the issues will provide additional integrity to financial statements and may help to reduce audit costs in the future. The auditors will point out any material internal control issues in the management letter so that the entity can address those issues before the next audit.
- Operating Inefficiencies. Management letters may identify issues that are or could become red flags, and propose improvements to resolve problems and strengthen operations. Sometimes it takes an independent or outsider’s eye to identify inefficiencies that could be improved or new technologies that will improve operations. The auditor’s letter to management may also point out operating procedures that are inefficient or unnecessary.
So there you have it. Once all the findings are identified, better practices vetted and recommended, and the early adoption of solutions implemented, then you truly celebrate a job well done. After all, audits aren’t merely a progress report. They are a snapshot on the progress being made within an organization, generally accompanied by “next steps” that sometimes overshadow the audit itself.
How about your organization? Are you maximizing the value of your audit by turning it into a present tense document? If you are, then you are already following what is quickly becoming an MLS industry best practice.
This article was by submitted as a special collaborative effort on behalf of the CMLS Finance Section Council.