FASB New Not-for-Profit Standard: Maintaining Auditor Independence
Although the Financial Accounting Standards Board’s new not-for-profit financial reporting standard (ASU 2016-14) does not go into effect until 2018, it includes significant changes that both not-for-profits and auditors should begin preparing for now.
ASU 2016-14 will require several modifications to the existing framework of the financial statements as well as new required disclosures related to liquidity, availability of assets and board-designated net assets. Further, it may require organizations to revise certain policies and procedures, update financial reporting practices and make net asset accounting adjustments. All of this could seem overwhelming.
If you are an auditor, many of your clients may reach out to you for help and guidance. During a recent Not-for-Profit Section webcast on the new standard, there were many questions about how auditors can help their clients navigate through these changes while maintaining independence. As such, here are some basic guidelines regarding the assistance auditors can provide through this transition, and which activities would be prohibited and impair independence.
In general, independence rules typically do not prohibit auditors from providing routine technical assistance, training, and guidance on best practices. Assisting management with preparing the financial statements, account reconciliations and other bookkeeping services, are considered nonattest services. These services require that auditors put certain safeguards in place to protect independence. The underlying principles of AICPA Code of Professional Conduct section 1.295, Nonattest Services, are that auditors cannot function as management, make management decisions or audit their own work. As such, activities such as designing, implementing and monitoring internal controls and information systems, and assuming management responsibilities, are strictly prohibited for attest clients. Before performing any nonattest services, the auditor should document the objectives of the engagement, and the client’s acceptance of its responsibility for the results of the nonattest service, in the engagement letter or internal firm file.
With proper considerations, there are several areas wherein auditors could help clients implement FASB’s new not-for-profit financial reporting standard. These are outlined below:
- Proactively keeping clients informed and educated about the new reporting requirements and providing training opportunities.
- Preparing the financial statements to incorporate changes for net asset classifications and drafting the new required disclosures based on information provided by management.
- Helping management prepare any net asset reclassification entries that may be required. If an organization has underwater endowments that have previously been netted with unrestricted net assets (now net assets without donor restrictions according to ASU 2016-14), these will need to be reclassified to be netted with net assets with donor restrictions. In addition, if an organization previously had a policy to imply a time restriction on donations of, or contributions restricted for the purchase of, property and equipment, any remaining restricted net assets will need to be reclassified retroactively to net assets without donor restrictions.
- Being available to address compliance questions and periodically check in on the implementation process.
Independence is considered impaired when auditors are acting as management. As such, any decisions about financial reporting policies and changes to internal controls should be made by management and not the auditors. Although auditors may advise on these matters, the following are areas related to the new standard that should be addressed by the not-for-profit’s management:
- The financial statements will require disclosure of all board designations and similar self-imposed limits on net assets without donor restrictions. As such, management should establish or update policies and practices related to such designations on net assets and make sure any designations are adequately documented.
- Not-for-profits will now be required to add disclosure regarding how they manage liquidity and information about the availability of financial assets to meet cash flow needs. This could require organizations to establish methods for tracking this new information within the financial reporting process.
- Not-for-profits should update endowment spending policies, as the financial statements will require disclosures of policies for appropriating funds from underwater endowments.
So go ahead and get the conversation started! It will be important for not-for-profits and auditors to be resourceful with each other. This will help minimize disruptions to processes that major reporting changes like this can cause and help ensure a smooth and successful implementation.
The AICPA has developed resources including a nonattest services toolkit and a FAQ document that you may find helpful. Additionally, the AICPA Not-for-Profit Section is hosting a webcast entitled Implementing the New Not-for-Profit Standard - Practical Considerations on March 29 that may be of interest to you.
Candi Avery, CPA, Principal, Clark Nuber PS
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