Reviewing Financial Statements

As part of its financial oversight responsibility, a nonprofit board should review an organization’s audited financial statements on a periodic basis. These statements include

• Statement of Financial Position (Balance Sheet)
• Statement of Activities (Income Statement)
• Statement of Cash Flows
• Statement of Functional Expenses
• Notes (footnotes)

Creation of the statements is the responsibility of management and they are typically produced monthly. The monthly statements are presented for the month just ended as well as for the year-to-date to provide valuable reference points and to allow the board to see how well the actual results follow projected assumptions. At year end, the year-to-date figures reflect the accumulation of the previous 12 months of transaction activities applied to the balance sheet and income statement.

Here are some tips for board members reviewing financial statements

• Request that management show cash to the board in a trended monthly format (preferably as a graph) to highlight the movement of the organization’s cash balances.
• If accounts receivable or promises to give are a major portion of your organization’s balance sheet, ask the organization’s finance division to summarize its effort to maximize cash collections and to minimize bad debts and write-offs. Also request that they provide the policy for classifying purchases as capital assets and for depreciating them.
• Examine the most recent footnotes to the financial statements and discuss with the auditors any significant issues.
• Analyze with senior management the benefits and costs of adopting procedures similar to those outlined in the Sarbanes-Oxley Act. Discuss with the auditors the changes that would need to be made under the adoption.

This is an excerpt from the book Understanding Nonprofit Financial Statements, Third Edition by Steven Berger.