Generally Accepted Accounting Principles and Auditing of Non-Profits

Abstract

The following is a research paper that focuses on the subject of why the non profit organizations and the government based entities are subjected or required to get audited. The research paper highlights the importance of the GAAP audit alongside its specific objectives. Certain common problems and issues that arise during audits are also identified in the papers. Aside from this the paper provides that audits are required and mandatory for non profit organizations that generate sufficient level of revenues while all government operations and entities are subject to audit. Two separate boards govern the audit and GAAP guidelines for the non profit organizations and the government administered business entities. The specific GAAP audit requirements for the non profit operations and the government entities are highlighted along with the benefits these types of businesses receive from undergoing an audit.

Introduction

The GAAP are established accounting principles are established to standardize financial accounting (Bragg et al, 2004, p. 1). They are predominately employed when it comes to accounting and book keeping and also while preparing financial statements for businesses. The GAAP highlights the various procedures that have top be employed by the Proprietorships, partnerships and companies in order to initiate business, handle accounts, make regulatory reporting and perform audit on the financials.

The non profit agencies are business entities and corporations that do not exist to make profit and are also not public businesses. These businesses operate in a profitable manner but invest all profits back in the business for continuity. The GAAP rules and principles provide that not for profit businesses and agencies also have to prepare financial statements for reporting that include statement of financial position, statement of activities, statement of cash flows and statement of functional expense (Jones et al).

A governmental agency or an entity is a government owned business that is run as well as administrated by the government. The GAAP based accounting policies and procedures provide similar accounting procedures and financial statement regulations for government entities and related businesses.

The problem statement that is being targeted in this research paper pertains to the question ‘Why Not-for-profits and government entities must be audited’. The need for auditing these businesses is highlighted along with polices and procedures that are provided by the GAAP accounting principles when it comes to accounting and auditing Not-for-profits and government entities. Auditing is a requirement set forth by the FASB and the accounting regulatory board. The GAAP principles highlight that all businesses need to be audited on a periodic basis by an external party top assess the conformation of accounting and book keeping to the set GAAP regulations.

Research Questions

The objective of the research paper is to determine why audit is required for the non profit organizations and government entities and how the GAAP provides provisions and requirements for audit for the above mentioned business entities. The research questions that have been identified are as follows:

1. What is the importance of audit as per the GAAP?
2. What are the guidelines for audit for non profit organizations?
3. What are the objectives of the GAAP audit and the main identified audit issues?
4. How do nonprofit organizations benefit from an audit?
5. What are the guidelines for audit for government run entities?
6. How do government run entities benefit from an audit?

Importance of Audit in GAAP

The GAAP stresses that there is a need for periodic checks on the accounting procedures and policies being employed by businesses for regulatory purposes. These checks are performed on the financial statements reported by the businesses and require an external party usually a trained GAAP regulatory professional to conduct theses checks and verify that the business is conforming and adhering to the rules and principles that are laid down in the Generally Accepted Accounting Principles by the American Institute of Certified Public Accountants. “A GAAP audit is simply a certified review of your organization’s financial standing by a certified public accountant (CPA) in accordance with generally-accepted accounting principles as determined by the American Institute of Certified Public Accountants” (Required Financial Documents FAQ, p. 1).

The GAAP provides that internal as well as external audits need to be carried out. The internal audits are usually ongoing and are performed by qualified professionals that are hired by the business or the company themselves. This audit is undertaken to ensure no discrepancy exists in the account and book keeping of the business from the reported financial statements and figures.

The external audit is mandatory as per the GAAP as well as it focuses on ensuring that the business is reporting its financial, profits, expenses and income in the required manner while adhering to GAAP rules as laid known by the AICPA. Fraudulent activities and GAAP violations are focused upon in the external audit. Violations of the GAAP by businesses who are required to comply to are strongly condoned and penalties in the form of imprisonment and heavy fines are levied on businesses that are found to be in violation through the audit.

A well made audit report from an authorized and well reputed accounting/ audit firm helps generate a goodwill and reliability in the business. As a result more investors are willing to invest in the business as they can view the financial statements as being reliable and depicting the actual financial status of the business.

Objectives of the GAAP Audits and Audit problems

The audits are undertaken in the form of financial audits, attestation engagement, performance audits, and investigations. The guidelines for the audits are provided for the non profit organization by the AICPA and by the GAO for the government entities. The objective of carrying out the performance audits is to determine the efficiency of operations and accounting, their effectiveness and the economics of the business. They are generally geared towards identifying waste and highlighting it. The investigation audits however are conducted for the purpose of determining any criminal activity like fraud or the abuse of investor funds and donations.

The problems that are often highlighted by the audits pertain to presence of inadequate evidence for asset valuation, asset ownership and management representation. The lack of due professional care taken by the business for keeping accounts, and the lack of proper GAAP implementation as well as the incomplete application of GAAP principles and procedures for accounting (Beasly et al, 2001). These are the problems that arise on the part of the firms being audited. Aside from this lack of professionalism and due diligence shown by the auditor can also give rise to audit problems that can be penalized.

Audit for Non Profit Business Entities

GAAP requires all types of business to conduct an internal and an external audit to assess and ensure that the business is in compliance with the GAAP with its accounting and the book keeping procedures. Similarly the non profit business entities are also required to comply and adhere to an audit by a professional third party pertaining to an AICPA registered and GAAP qualified CPA.

The Financial Accounting Standards Board also known as the FASB is responsible for setting the GAAP specifically for the private sector which includes businesses that operate for profit as well as not for profit entities. The AICPA publishes the primary guide to GAAP for nonprofit organizations, the “Not-for-Profit Organizations Audit & Accounting Guide.” It also releases its own standards, called “Statements of Position. ‘The most recent, and controversial, is SOP 98-2, “Accounting for Joint Activities Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising.’” (Mercer, 1999) The AICPA requires the non profit organizations to adhere to the GAAP and provide a periodical Statement of Position as well as other publications to depict the financial standing and position of the business. The non profit businesses are required to provide revenue statements that are garnered from public support, except purpose activities as well as other form of revenue. They are also required to highlight program service expenses, and any other expenses associated with fundraising, operations and the allocation of costs (Mercer, 1999).

Specific procedures are provided for allocation of joint costs, raising funds, cost principles, grant agreements for education institutions and hospital based not for profit operations. The audit aims at accessing the compliance of the not for profit organization with the specific GAAP principles and highlighting any related discrepancies

The not for profit companies usually depend on donations and investors that provide loans and finding to the business for continuing operations. The little profit that is generated through these businesses is geared towards investing in the business. Therefore the not for profits need to inform the possible investors and donators about the viability and authenticity of their business and operations through the reported financial statements. “Having a thorough audit of the nonprofit’s financial statements increases the likelihood that the financial statements will accurately portray the non profit’s financial standing.

Potential lenders, donors, funding organizations and other stakeholders use the financial statements to make decisions about the nonprofit’s financial health, so it is essential that the statements present an accurate representation of the nonprofit’s financial status. Otherwise the stakeholders of the nonprofit may make poor decisions about making loans, giving contributions or providing funding.” (Jackson & Fogarty, 2006, p. 237).

Audit for Government Agencies and Entities

The GAAP rules and guidelines provide that the Government Agencies and government run/ administered entities have to be audited as well. The Governmental Accounting Standards Board also known as the GASB is responsible for setting the GAAP accounting principles for businesses that are owned and run by the local government or the state. Moreover in the United States the Federal Accounting Standards Advisory Board or the FASAB deals with the establishment of accounting standards and guidelines for the federal government based business operations and entities. “The AICPA Council designated FASAB as the body that establishes accounting principles for federal entities. The AICPA’s hierarchy of generally accepted accounting principles in Statement of Auditing Standards (SAS) No. 91, The Federal GAAP Hierarchy, governs what constitutes GAAP for U.S. government reporting entities. The hierarchy lists the priority sequence of sources that an entity should look to for accounting and reporting guidance.” (Generally Accepted Accounting Principles)

The GAAP provides that a set of financial statements highlighting revenue, expenses, profit and the cash flow situation of the government entity are to be prepared according to specific procedures as per the GASB and FASAB. However these financial statements are slightly different from the normal financial statements drawn by the private sector entities and the non profit organizations. Similarly the audit requirements set for the government owned business entities and agencies are also somewhat different.

The government auditing standards provide that the auditors report should depict compliance with the GAGAS, depict the internal control and compliance in the organization with the laws and grants agreements, report any present inefficiencies and wastage in the accounting procedures employed, and the restatement of previous as well as current financial reports of the entity. (Chapter 5: Reporting Standards for Financial Audits).

Conducting a routine audit as specified by the GAO for government entities can be beneficial for the government owned and run businesses. This is because the audit helps provide to the general public how their resources and tax dollars are being spent in an effective and efficient manner by the government through to run its administered businesses that comply with the required laws and regulation. The audit of the government run entities is crucial as it allows the government to release o the public about its management style, accounting procedures as well as increasing transparency of where government funds are employed.

This increases the confidence of the public and encourages more funding and deployment of beneficial government entities and programs. “Government auditing standards provide a framework to auditors so that their work can lead to improved government management, decision making, oversight and accountability.” (Chapter 11: ACCY 161 – Spring 2009 Auditing Governmental Entities and Some Nonprofit Entities).

Conclusion

Through the literature review based research undertaken for the purpose of the research paper, it has been determines that the GAAP provides specific accounting policies and procedures for both the non profit organizations as well as the government run businesses and entities. These accounting policies have customized provisions for the respective business types and their industry of operations. However they are both required to subject to an annual periodical review of the business called the audit.

The FASB provides the audit and GAAP guidelines for the non profit organizations while the FASAB and the GAO provide the GAAP guidelines and audit provisions for government administrated businesses entities. The audit that can be under taken on the non profit organizations and the government entities can be either financial, performance based or investigative in nature where the focus is wither of wastage of resources or fraudulent/ abusive activity.

Conclusively it can also be provided that the presence of an annual audit requirement is beneficial in the long run for both the non profit organizations as well as the government entities. This is because the it provides transparency of records and operations for the NPO’s and government entities to the stakeholders and the public therefore increasing investor confidence and providing aid in the generation of funds and resources for operating the business. The management effectiveness and the efficiency of the operations are also accessed and compared with industry standards which can help increase the efficiency of the business operations for both the non profit organizations and the government entities.

References

1. Bragg, S.M., Wiley, J., & Sons, (2004). GAAP implementation guide. John Wiley and Sons. Web.
2. Jones, R., Benson, M., Afterman, A., (2009), Nonprofit GAAP Practice Manual. Web.
3. Required Financial Documents FAQ.
4. Kacson, P.M., Fogarty, T.E., (2006). Sarbanes-Oxley and Nonprofit Management: Skills, Techniques, and Methods. John Wiley and Sons, Web.
5. Mercer, E., (1999). Critical Issues in Financial Accounting Regulation for Nonprofit Organizations. Online Compendium of Federal and State Regulations for U.S. Nonprofit Organizations. Web.
6. Chapter 11: ACCY 161 – Spring 2009 Auditing Governmental Entities and Some Nonprofit Entities,.
7. Generally Accepted Accounting Principles, Federal Accounting Standards Advisory Board.
8. Wallace, W.A., (2007), Mastery of the Financial Accounting Research System (FARS) Through Cases, Wiley & Sons
9. Chapter 5: Reporting Standards for Financial Audits.
10. Beasly, M.S., Carcello, J.V., Hemanson, D.R., (2001), Top 10 Audit Deficiencies. Web.
11. Silk, T., (2004), Ten Emerging Principles of Governance of Nonprofit Corporations and Guides to a Safe Harbor, International Journal of Not-for-Profit Law, Vol. 7 Iss. 1.