When did you last try to work out how a donor-specific financial report fitted into an organisation’s institutional financial statements? Probably very rarely because it’s almost impossible. Donor reports are frequently prepared on different bases from the general-purpose financial statements (GPFS) and even from each other. Reporting formats are unique to donors. General ledger data is processed through spreadsheets to present what the donor requires (or what the grant recipient wants to show the donor?), carrying the inherent risks associated with manual operations outside the normal internal control systems.
The scope for reconciling grant reports and the GPFS is minimal at best. Yet, without this, how can we be sure that reports to donors are truly reliable?
For example, to consider just one area, the nature of the process for producing donor reports creates the risk that double funding is lurking in the background, undetected. One of the key tests for identifying the existence of double funding, in the audit of both grant reports and the GPFS, is simply to add up the figures reported to donors and reconcile the results with the GPFS. But with a complex mix of reporting bases, formats, currencies and periods, this is a daunting and complex task that is avoided by most auditors.
Despite this, grantors rely on the donor-specific financial statements they receive as providing a sound basis for their oversight and for their own accountability, not recognising the scope for the reports to be misleading.
From my work with hundreds of audit firms of all sizes over many years I have learned that auditors are also over-reliant on audit methodologies that fail to address this and many other areas that are unique to the NPO sector. Being up to date with changes in laws and regulations is not the same as understanding special sector-level risks that don’t exist in the world of commercial entity audits. Performing an audit that is little more than identifying a document to support each item of expenditure provides very limited evidence about whether the financial reports show a true and fair view, especially in the context of non-exchange transactions. The specialist training I provide, with my colleagues at EMPACTA® through the Flying Accounting University, aims to strengthen the audit of NPOs, but the sector and its auditors need more help. A single, clear reporting structure or framework would hugely enhance the reliability of NPO financial reporting and permit a more consistent approach to auditing them.
So, it’s great to see that the IFR4NPO initiative is addressing this by creating, in International Non-Profit Accounting Guidance (INPAG), a framework to bring consistency to the field, encompassing both GPFS and, in supplementary statements and grant reporting. This will introduce a recognised, fair presentation financial reporting framework, based on standard definitions and supported with clear reconciliations between grant reports to donors and the GPFS.
No more will we see donors comparing their financial reports with the GPFS and, after hours of work, concluding that, “Yes, our money certainly seems to be in there somewhere”. No more auditors saying, “Well, I’ve found a piece of paper supporting each item of expenditure, so I guess the financial statements must show a true and fair view”. We are moving to a world where all the actors will know what is required in financial reporting. It will be the same, every time, for all users. A world in which the audit methodology does not have to be redesigned for each assignment. A world that provides a firm foundation for the sector, on which true financial understanding can be built.
David Wortham is a Chartered Accountant, based in the UK, with over thirty years’ experience around the world as an auditor, consultant and trainer, working with NPOs, their donors and their auditors. You can reach out to him via email
EMPACTA® is an association of international auditors with a special interest in strengthening the performance of NPOs and their auditors as part of its mission to promote accountancy as a social science.
The Flying Accounting University is a project of EMPACTA® that delivers training to the Association’s members, the audit profession more widely and to the NPO sector.
INPAG Exposure Draft 3 is open for public comment until 16 September 2024.
