Nonprofit Audit and Form 990 Readiness Starts Before Year-End
A smoother audit starts months before the auditor arrives.
That was the central message from John Pace, partner at GRF CPAs & Advisors, during a recent webinar hosted by Ramp.
For nonprofit leaders and finance teams, the takeaway is practical: consistent accounting, clear responsibilities, and timely documentation can make year-end easier while providing better information for decision-making throughout the year. Read on for John’s tips and insights for making your audit go more smoothly!
John is a partner at GRF CPAs & Advisors and leads the firm's outsourced accounting and advisory services group.
His team specializes in serving nonprofits and government contractors.
Watch the Webinar RecordingReadiness Tips
Audit readiness is built into the monthly close. Year-end should bring together work completed throughout the year.
Every material balance sheet account should have a reconciliation, supporting schedule, or other appropriate documentation before fieldwork starts.
Read grant agreements when they arrive. The terms determine the accounting, regardless of what the document is titled.
Form 990 preparation reaches beyond the trial balance into governance, compensation, and program accomplishments. Management owns the review process.
Why does the year-end scramble cost so much?
GRF’s client accounting services approach starts with a full accrual-basis close every month, with balance sheet schedules rolling forward. “A lot of the mystery hides on the balance sheet,” John said.
Delaying that work may result in additional audit fees, more pressure on staff, and a longer audit process. John noted that some audit firms charge premiums when prepared-by-client (PBC) items arrive late, depending on the engagement terms, and similar provisions may apply to Form 990 preparation. Rushed teams are also more likely to make mistakes that lead to audit adjustments or findings.
Timing matters too. If you wait until 60 days before filing, John warned, you may have trouble finding a CPA firm with capacity to take on your 990 at all.
Is your balance sheet ready for an auditor?
“Classically trained accountants, as I like to say, always start with the balance sheet,” John said. His test is simple. Every material account should have a reconciliation, supporting schedule, or other appropriate documentation that supports the amount in the trial balance. An income statement can look reasonable while the balance sheet hides problems that later become audit adjustments.
Walk your balance sheet account by account and look for these warning signs:
- Reconciling items on bank, card, or investment accounts that have sat for months
- Negative receivable balances, which often point to unapplied payments or mis-posted credits
- Prepaid expenses that never get expensed
- Deferred revenue balances that remain unchanged without a clear explanation
Deferred revenue deserves extra attention from associations and other organizations that collect payment before providing membership benefits, hosting events, or other services in exchange. For that exchange portion, recognize revenue as the promised goods or services are provided. Any contribution portion requires separate analysis, and timing of recognition may differ from the exchange portion. These balance sheet accounts carry forward year after year, so rebuilding an unsupported balance can mean sorting through years of transactions. “It’s a puzzle,” John said.
Fixed assets are another blind spot. If no one has counted physical assets in years, the register may list items that are long gone.
John’s example: “Does anyone know if we still have that desk that’s 20 years old?”
For first-time audits, pay particular attention to net assets. Reconcile beginning balances and prepare a rollforward that distinguishes net assets with and without donor restrictions, tracks releases from restriction, and identifies board-designated amounts within net assets without donor restrictions.
Where Do Grants Trip Up Nonprofits?
Grants and restrictions are what John calls "gotcha zones." His team reviews grant agreements as they arrive rather than leaving the analysis until year-end. Waiting can turn an accounting question into a much larger cleanup project.
Start by reading the agreement. John described a grant labeled as unrestricted general support that also required activities narrower than the organization's overall mission. That inconsistency is a reason to examine the terms carefully and seek clarification from the funder when needed.
He also explained the difference between a contribution and an exchange transaction.
Contribution
A foundation grant supporting AIDS research for the public benefit is typically a contribution. The funder does not receive commensurate value in return. Receiving a report about how grant funds were used does not, by itself, make a grant an exchange transaction.
Exchange Transaction
A company paying $50,000 to commission a study for its own use may be purchasing a service. The key question is whether the funder receives commensurate value in return.
Another common source of confusion is the difference between conditions and restrictions. A conditional contribution includes both a barrier the organization must overcome and a right of return of funds or release from the funder's obligation if the barrier is not met. Recognize contribution revenue when the conditions are substantially met or explicitly waived by the donor. Cash received before then is generally a refundable advance, a liability rather than revenue.
An unconditional contribution is generally recognized when received or unconditionally promised. Donor restrictions affect its classification, rather than postponing recognition until the money is spent. For example, an unconditional grant restricted to next year's programs is generally recognized now as revenue with donor restrictions. The restriction is released when the applicable time or purpose requirements are met. That release reclassifies net assets; it does not create additional total revenue.
If your organization receives federal funding, monitor federal awards expended throughout the year. The Single Audit threshold increased from $750,000 to $1 million for fiscal years beginning on or after October 1, 2024. The trigger is $1 million or more in federal awards expended during the fiscal year, rather than the amount awarded or received. Include federal awards passed through other organizations in that assessment.
What does an auditor need beyond a receipt?
A receipt or invoice is the starting point. Supporting records should also establish the business purpose, the appropriate program or grant coding, evidence of required approval, and the correct accounting period. For grant-funded costs, the documentation should support compliance with the award’s requirements as well.
John’s advice is to capture that detail at the point of spend. Someone who made a purchase eight months ago may no longer remember which grant it served. “Let’s get the data in clean the first time,” he said.
Can a small finance team still have strong controls?
Yes, but the reviews need to be deliberate. For one- to three-person teams, John suggests starting with cash and the executive director’s spending. Route the ED’s expense reports to the board chair or another designated board member for approval. Have the treasurer or another independent reviewer receive bank statements, examine activity, and follow up on unusual transactions. Document those reviews.
Bring the same questioning approach to financial reports. When a statement of activities by project arrives, read it closely, compare it with expectations, and ask about unusual balances or trends. Where possible, have someone other than the preparer perform the review. Returning to your own work with fresh eyes can help catch errors, but it does not replace independent oversight. Technology can make approval routing and documentation easier, while people remain responsible for performing the reviews.
What’s the hardest part of Form 990?
For organizations with clean books, John said the hardest information to gather is often outside the ledger. Board rosters, compensation information, governance policies, and program records all need attention. Confirm who served during the reporting tax year and which former individuals remain reportable, rather than carrying forward last year’s list. A director who left during the reporting year generally still needs to be included for that year.
He also flagged a missed opportunity. Form 990 is public, and donors look it up. “Don’t underestimate your program accomplishments,” he said, sharing advice from GRF’s tax team. Use that section to show what makes your work matter.
Watch the Full Conversation
The on-demand recording covers monthly close practices, balance sheet cleanup, grant accounting, lean-team controls, and Form 990 preparation.
Talk to John
If your team is heading into audit season behind, or you’re facing your first audit, reach John Pace directly.