Finding 964099 (2023-001)

Criteria In order to ensure that financial statements are properly stated, it is necessary that revenue be recognized as prescribed by applicable revenue recognition accounting standards. Condition During our audit, we noted that contribution revenue and net assets with donor restrictions were misstated by a material amount. We also noted cost-reimbursement grants for which government contract revenue and deferred revenue were also misstated by a material amount. In both cases, the applicable revenue recognition standards were not adhered to. Context There were several contributions where revenue was not properly recognized and net assets with donor restrictions were not properly identified, tracked, and released. Government contract revenue was misstated for two federal programs and deferred revenue was misstated for one of these programs. During the audit, we assisted management in preparing the adjustments necessary to correct these issues for the period under audit. This finding is a repeat of finding 2022-001. Effect Management may not be able to detect material errors and omissions in its financial reports. As a result, inaccurate financial data may be shared with outside users. Cause The misstatement of donor-restricted contributions was caused by an accounting process in which unconditional contribution revenue with donor restrictions was not recognized when awarded, but rather, when donor restrictions were released or when payments are received, thus causing a timing delay in the recognition of revenue. The misstatement of the cost-reimbursement grant was due to an oversight in which an adjusting journal entry was not recorded to report unspent federal advances as deferred revenue. Recommendation We recommend that all unconditional contributions be recognized as revenue as of the earlier of receipt or notification of the contribution. Conditional contributions should be recorded in the period in which substantially all conditions have been met. We also recommend that net assets with donor restrictions be properly tracked and released as restrictions are met. Releases from restriction should be recorded as a reclassification between net asset accounts with no effect on revenue. Lastly, we recommend that cost reimbursement grants, regardless of funding source, be reconciled at year-end so that receivables, deferred revenue, and revenue can be adjusted as needed to ensure that the accounts are properly stated. Management Response Management concurs with this finding. See corrective action plan.