Finding Text
Finding 2024-001 Financial Close Process
Type of Finding:
Material Weakness in Internal Control over Financial Reporting
Condition:
During the audit, it was noted that the Organization lacked a robust financial close and review process. This deficiency resulted in multiple material audit adjustments across key financial statement accounts, including inventory, accounts payable, fixed assets, deferred revenue, and related activity accounts. These adjustments were proposed by the auditors and subsequently recorded by management in order to fairly present the financial statements in accordance with generally accepted accounting principles. The extent and materiality of the adjustments indicate that the Organization's existing closing procedures were insufficient to identify and correct errors prior to the audit.
Criteria:
Management is responsible for adopting sound accounting policies and establishing and maintaining a system of internal control for the fair presentation of the basis financial statements in accordance with accounting principles generally accepted in the United States of America.
Cause:
The underlying cause appears to be a combination of a lack of formalized month-end and year-end close procedures and limited coordination between management and the Organization’s external contract accounting firm. Without clearly defined timelines, responsibilities, and communication protocols, important financial information may not have been shared or reviewed in a timely manner, increasing the risk of errors or omissions during the close process.
Possible of Known Effect:
Because of this gap in process and communication, material misstatements were present in the Organization’s financial records and required auditor-proposed adjustments to ensure the financial statements were fairly stated. While these corrections were made before issuance, the absence of a consistent and well-coordinated close process creates a risk that financial statements could be misstated in future periods if similar issues are not identified in advance.
Recommendation:
We recommend that the Organization develop and implement a formal financial close process that includes clear timelines, assigned responsibilities, and review steps for all key account areas. In addition, improving communication protocols between internal management and the external accounting firm—particularly around the timing and completeness of financial information—will help ensure that the financial records are accurate and complete prior to the start of the audit.
Views of Responsible Officials:
The Organization will develop a financial close calendar with clear deadlines. We will create a standard operating procedure for account reconciliations, journal entries, and financial reporting with assignments to specifics staff. The Organization will implement a review and sign-off process for financial reports at board meetings. The Organization plans on hiring a part-time finance manager to help us with documentation and reporting.