I’d like to review my grammar in a response letter that I wrote to Board Members since I’m not a native speaker. I want to share the message with clarity and show the right course of events properly. The subject is confidential so share the content is not allowed for purposes different than proofreading reviewing.
To all Board Members and Executives of Tykes & Teens.
Response Letter to Audit Finds terminology and content of Management Letter
This letter has the primary objective to clarify information regarding the statements made by Auditors in the last management letter related tothe 2018/2019 audit process. Reading the reports and recommendations made by Auditors, especially the technical terminology used, is expected that we give some clarification. It isnecessarynot only for internal improvement and transparency but also re-statethat in the course of events,the executive team hasactively pursued better standards and practicesalways in compliance with all required parties.
In the first place, I’d like to state:
Since my start in May/19, the CEO requested to run a plan to upgrade Tykes’financial standards in compliance with new requirements from grantors and also improve the quality of the financial reports to support executivesin the decision process. He was transparent about the issues reported in the previous audit and his perception about some accounts, especially in Balance Sheet and Cash Flow Statements. The former manager only stayed for15 days, sharing some information during the transitionperiod and get her contract terminated. The financial department had started with just one bookkeeper responsible for Accounts payable and payroll, and a billing department with no integrated systems. Multiple outdated policies and a lack of knowledge of staff were a reality. So, we started doing system integrations (1stbilling, 2ndbanks, 3rd contributions), organizing the accounts (and codes) based on accounting standards. The accounting software was an old version of QuickBooks Desktop that was not designed for bank integrations and simultaneous users, so we decide to migrate to QuickBooks online and linked all banking accounts and corporate credit card to the system.
Since most Income accounts were merged, miscoded, and recorded along several years, the 1st action was designing a new chart of accounts.We’vefound that Contributions, Grants, and Contracts,previously all mixed, should be segregate since their contractual nature makes the accrualmethod specific for each one. Reimbursement basis grants and conditional basis were also separated since they have different billing cycles. Without this new “taxonomy,”we wouldn’t be able to promote necessary corrections that had beenmisreported in previous years, the reason why requiredaudit adjustments in past years.
In July/2019, the Board approved the new chart of accounts,and it was the baseline for the 2019/2020 budget. After that, we decided to move forward with the improvements using the assumption that the past transactions were recorded right, and the accounting system migration had occurred without errors.Since July/19, we focused on coding, classifying, and start bookkeeping following the best practices and also improve some internal controls to allow us better to manage our balance sheet and cash flow positions.
The beginning of corrections:
We used the last audit letter as a start point to research some accounts, and we found that some of those balances that weren’t matching with other systems. The 1st find wasabout deferred income method for some transaction which grantors credit us cash in advance, and anotherissue was about beginning balances on restricted contributions.
On May 16th (even before the end of FY), I sent an email to Auditors requesting clarification about those deferred income transactions and sought a 2nd opinion before corrections (A1). The request for clarificationswas made again on Jul 16th(A2) and 30th(A3).Becausesubstantialamounts needed corrections, I created atemporary Equity Account called “Accumulated Adjustments.” This account intendedto make it easier for auditors to check our corrections and discuss allocations, making it reversible ifit was consent. We expectedto correct it before the end of the FY.
On Sept /2019, to prepare the company for the Audit process, and aware that some corrections were needed, we met with Auditors to plan our project. We aligned toshare a Trial Balance reportfirst, and get an overview. Seeing that the Auditors had participated in previous years, they would help us to find pending corrections, allowing us to fix it before submit the complete list of docs.
As part of reciprocity,the Auditors highlighted in 1ststagethat the Deferred Grants (the same subject of our previous request) and payroll liabilities accounts should be subject to attentionbefore the audit date scheduled to Oct 14th. (A4)
On Oct 7th, we created a virtual shared folder to upload our backup documents as set on audit list (A5), the agreementwasas soon we find discrepancies we’ll notifying mutually before any corrections.In the same email thatsends the link, we’ve informed we find corrections needed in AR and doubtful/uncollectibleaccounts and requested clarifications before adjustments.
As a temporary account, the”accumulated adjustments”were put in a separate folder to allow us to discuss all transactions (A6). The auditors confirmed it and said the info wasuseful to get the process started.
Resume of Audit process and correction plan:
On Oct 22nd, the Auditors requested information about a specific uncleared transaction(A7), and researchingGeneral Ledger, we (Tykes) found that a glitch in QB migration marked some checks already paid as “uncleared” and we notify the auditors(A8). From there, we hired a QB external advisor to help us in those corrections in the system caused by the data migration process. During the research by QB Advisor, we (Tykes) found corrections needed in other accounts by miscoding or errorsin bookkeeping, before we do any correctionswe have requested authorization from auditors on Dec/10th(A9) and Jan/07th(A10).
On Jan/17th(A11),we met the Auditors to present a detailed correction plan (A12) with all corrections needed, and we got authorization to start with that but with a commitment to don’t change the 2018 beginning balances(A13). We interrupted the process to fix the finds.
Doing those corrections, we found a significant error on Payroll expenses (accrual vs. cash method)—thebookkeeping method used over the years created a discrepancy between the books. This error affects mainly the last payrollof the year, andthe following checking account balance (NET3). The beginningbalance of 2018 FY should have creditinchecking account to clear on July 3rd,2018 (Payroll + Taxes).As a solution, we created a “Payroll clearing account,” that offset the debit (liability) with credit in cash flow, and made all payroll bookkeeping over. Auditors did not request this find, but we informed them in advance.(A14)
After finished those corrections, I copied the CEO with the correction plan and requested his support to avoid new delays from auditors. (A15) On Feb 19th we shared with treasurer a detailed resume of actions and a copy of the correction plan as well.(A16)Because some significant corrections impacted the current FY financials (Payroll and Deferral Income), the treasurer informed the Board about those corrections atthe meeting of March. A new procedure was requested to call the financials as “proforma” since some account was subject to change until the final auditing process, and a disclaimer started to be part of reports since them.
Some software limitationsdidn’t allow us to make corrections at the transaction level, so we requested that some accounts should be corrected using journal entries. The auditors approved it on Feb 24th. (A17)On the same day, we submit to the new Trial Balances, Profit & Loss and Balance Sheet reports updated, and the audit restarted.
Because some grantors hadstarted to requesting us the audit reports, we had suggested by phone that the auditors use the management letter (it was the case) to recommend improvements are needed.Especially for AR, whereas our current software doesn’t heave advanced controls for aging.Since them, we request or Provider (Lauris) to create a customized report to assistthe finance team with data, we expect to have it in place in 2 weeks.
In March, with the impact of COVID19 restrictions,we received a new postpone letter from auditors. On May,6th the auditorssent us a final draft, recommending further adjustment (On assets depreciation and release of unrestricted assets). We adjusted the accounts in trial balance on May 8th, and so we received a full package for revision with a management letter.
Comments about Management Letter received:
In the Management Letter, the auditors have used an audit terminology for findsasSignificant Deficiencies for items 19-01 and 19-03. So is important we clarify the meaning of this terminology for audit finds.
A significant deficiency is an internal control deficiency that is less likely to have adverse effects on the financial statements than a material weakness but still merits attention from those charged with governance. So, a material defect is a more prominent deficiency, and a significant deficiency is smaller
A Significant deficiency is the 2nd in a scale of finds, must be reported to governance, and must have “more than remote” chance to happen in the future without any improvements and recommendations.
On the comment 19-01 (18-010 continuation):
The auditors reported that:
“If the misstatements were not discovered through the audit process, and adjustments were not recorded, the issued financial report for Jun 30th, 2019 would have been materially misstated“.
The auditors note that this find is a continuation for comment 18-01 from the prior year audit. He is referring to 2017/2018 finds, that was corrected by Tykes in 2018/2019 but is silent about Tykes correction plan and our requests for that correction before the audit starts. Since they also attested that the adjusted were corrected, this find wouldreceive a Control Deficiency classification since it is not likely to happen again in the future.
On comment 19-03:
The auditors reported that:
“Upon notification of incorrect treatment, managed reversed the entries to the accumulated adjustments account.”
Since Tykes created this account as temporary and intending to present and discuss allowances and the auditors attested that the report is reversed the chance it happens again lass than remote in the next years. Forthis reason, this find should be considered a Control Deficiency.
The auditor’s report that “had identified significant deficiencies (19-01 and 19-03) that… if not corrected, will be considered Material Weakness.”
A material weakness is the last grade of finds, indicating that misstatement will probablynot be prevented, detected,and corrected on a timely basis. This term might be a red flag for some donors, and that is the main reason for our dispute.
On both, the management letter itself and audit report attested that the corrections were made, so conjure this hypothesis is countersense, and this excess could create unnecessary reactions.
As detailed above, the Tykes correction plan findsan essential part of corrections made and kept auditors informedin advance. It happened in a joint effort to get all adjustments done as soon as it identified, always looking for present proper numbers.Some corrections started even before the audit finds, and the majorones were made following the correction plan previously informed and are part of the updated financials sent.
Other facts that support or thoughts that future finds are less likely to happen:
We agreed with all finds and recommendations and recognized the supportive approach from Auditors during this process. But we want whereby to highlight the proactive approach of the management team and request that the technical terminology used,be adjusted to indicatethis fair reciprocity.
As previously said, our effort in this clarification has the main intention to avoid misconception by grantors and funders, and we reinforce our commitment to always use good faith and transparency in our actions. So evenin case of any adjustment be made by Auditors on the terms employed.We agreed that those docs be released as initially drafted to all Board Members, respecting Internal Confidentiality procedures.
I’m available to all the necessary clarifications required.
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