Association Audit Results: Three Essential Insights for Governance

Most associations’ financial statement audits are concluded through audit results debrief meetings, whether virtual or in-person, where the auditors and the management team are present with governance. These meetings are designed to summarize the financial condition results from operations and the audit results.

The insights provided by the auditors to governance are meant to assist in evaluating historical figures yet move the association forward. Review three key insights association governance should take away from audit results meetings as associations’ fiduciaries.

1. “How did we do?”

During the meeting, governance will be provided with the draft audit report and the audited financial statements. These financial statements consist of a statement of financial position (balance sheet), statement of activities (income statement), statement of cash flows, and a statement of functional expenses. The disclosures (footnotes) will follow these financial statements.

The figures that governance sees within these statements are more than just numbers. From these meetings and reviews, governance should be able to obtain a transparent and comprehensive overview of the association’s financial health, financial stability, and whether the assets are being put into effective use to fulfil the association’s mission.

Insights governance should obtain include:

• If the association prepares comparative financial statements showing both current and previous fiscal year balances, look for any anomalies or material fluctuations and gain insights as to what caused those figures to change significantly.
• The association’s total assets equal total liabilities plus net assets. Does the association have an adequate portion of net assets as reserves? Does the association have enough net assets without donor restrictions to fund its ongoing general operation? A quick calculation of this coverage can be achieved by looking at the association’s total expense for the fiscal year on the statement of activities and comparing that figure with the total net assets without donor restrictions balance on the statement of financial position. We’ll address this point in more detail as we answer this second question. For associations, there’s no simple answer to “how much is enough,” but a general rule of thumb is ½ to a full year of reserves should be adequate to weather future storms.
• Look for the bottom-line figures on the statement of activities. Which factor contributed the most to this current year’s change in net assets? Identify the source of revenues or expenses that changed drastically this fiscal year that may have factored into those results and discuss with management for any resolution.
• Dig into the statement of cash flows and understand where the association had significant cash inflows as well as cash outflows. It’s often difficult to identify the source of change in cash solely based on the statement of financial position and hence the statement of cash flows should provide a clear picture of this fluctuation.
• An association’s financial statement disclosures are crucial to providing additional context and detailed explanations that narrate the current financial health of the association. Gain an understanding for any newly added footnotes such as newly adopted accounting standards and how the accounting treatment differs from previous years. Moreover, explore other highlights such as investment asset allocation to see if the funds followed the board-approved investment policy statement and identify any footnotes related to subsequent events past the fiscal year end or contingent gains or liabilities that may impact the association’s financial health in future periods.

2. “How do we look for the future?”

Foresight is now a requirement of fiduciaries. After navigating the financials, governance should have a deeper understanding of the audit operation as well as the association’s current financial health. Based on these understandings, certain items to consider for the future fiscal year are:

• Looking into the current net asset reserves designated for general operating use, how does that reserve compare with the next fiscal year’s budgeted expenditure? Does the association have enough to carry out its operation, or should governance direct management to deploy available options to finance future costs?
• A majority of associations hold a sizable amount of investment portfolios. Although investment performances may oscillate based on market performance, there are still a few things governance can chime in on better performance in the future, such as revisiting the investment policy statement to see if governance needs to reallocate target portfolio allocation to be more favorable based on the current market. Additionally, discuss current cash balance and identify if the association can redirect this excess cash to an investment portfolio that generates additional revenue.

3. “How did the audit go?”

The final and most vital insight governance should take from these meetings is “How did the audit go this year?” Although as obvious as it may sound, governance must understand the audit process to verify the auditors and the management team have performed their assigned responsibilities. The audit report that states the unmodified (clean) audit opinion is a fraction of the whole audit operation for the fiscal year. Therefore, it’s important to thoroughly read the letter to those charged with governance drafted by the auditors to gain further insights.

Key items to focus on in this letter include:

• Are there any recently adopted accounting standards?
• Does the association have any highly sensitive accounting estimates?
• Were there any adjusting entries or uncorrected misstatements?
• Were there any difficulties or disagreements while performing the audit?

The letter should have clear answers to each of these questions. If there are any challenges identified within this letter, governance should further discuss the matter with the auditors and come up with a solution to mitigate this challenge in future audits.

In addition, from the provided internal control letter, governance should also review the letter to see if there are any significant deficiencies or material weaknesses. Often, these written internal control deficiencies can pose reasonable possibility that there could be a material misstatement on the financial statements that are shared all year long with governance. Governance should address management’s plan for the resolution of these deficiencies.

Depending on the type or the specific mission of the association, the key takeaways from these meetings could vary or could expand further. However, being able to absorb these three main key takeaways from annual audit results meetings may help governance better manage the association’s financial affairs, thereby protecting the association’s assets and reputation.

How we can help

We understand the important role associations play in our society, and we have extensive assurance and tax experience in the association industry. Our team works closely with management and governance, communicating throughout the year to create strategies that meet your short- and long-term needs.