Top 5 Ways Non-Profits Can Reduce Audit Risk and Boost Donor Confidence

Non-profits operate in a highly visible space where financial transparency directly affects trust, funding, and long-term viability. As the post-tax season period begins, organizations must prepare for the next critical phase: ensuring that internal operations and audit readiness support both compliance and donor expectations.

Regulatory pressure continues to rise, and donors are paying closer attention to how financial stewardship aligns with mission delivery. Strengthening your internal controls and risk management practices today helps secure the trust and support you need tomorrow.

Here are the Top 5 Ways to Reduce Risk and Boost Donor Confidence as a Non-Profit:

1. Strengthen Internal Controls Around Financial Processes

Internal controls are the first line of defense against audit findings, fraud, and financial misstatements. Many non-profits rely on lean teams with shared roles and responsibilities, which makes proper segregation and oversight more challenging.

Even well-meaning staff may unintentionally skip procedures or fail to document key decisions properly. Tightening your internal controls helps protect against both human error and regulatory scrutiny.

Start by conducting a process walkthrough with a third party or internal advisor to identify areas where controls can be better defined and implemented. Focus on high-risk areas like cash disbursements, grant reporting, payroll approvals, and procurement. Segregation of duties, approval workflows, and backup documentation should undergo regular review and documentation.

2. Formalize and Document Policies

Auditors rely on formal documentation to understand your processes and validate the data within your financial statements. Too often, non-profits have procedures that are followed in practice but not written down. That lack of formality increases risk during audits and can create uncertainty when staff transition or new board members join. Establishing a documentation culture ensures continuity, consistency, and clarity.

Begin by reviewing core policy areas such as finance, operations, human resources, and compliance. Engage key decision makers within these areas to help draft core policies and ensure they reflect the actual practices. Focus on areas that affect financial reporting, grant usage, and donor restrictions.

Where policies already exist, confirm they reflect current practices and are accessible to all staff and board members. For areas without formal documentation, prioritize those most relevant to financial oversight and external accountability.

3. Perform Regular Audit Readiness Reviews

Waiting until audit season to evaluate your preparedness is a common but avoidable mistake. Proactive audit readiness reviews help identify issues early and reduce time-consuming requests from auditors.

Non-profits that build audit preparation into their regular calendar are far more likely to avoid findings and delays. These reviews also increase staff confidence and improve communication across departments.

Conduct mid-year and pre-year-end check-ins to assess reconciliations, grant tracking, board minutes, and major account balances. Regular periodic reconciliation processes also provide confidence that data is regularly reviewed and verified. Involve your leadership and finance team in each review to ensure alignment across program and back-office functions.

Consider building a rolling file that includes board governance documents, key contracts, funding agreements, and year-to-date financials. These materials can streamline audit prep while signaling professionalism to auditors and funders.

4. Improve Grant Compliance and Reporting

Grant compliance is critical to minimizing audit exposure, especially when restricted funds or federal awards are involved. Misreporting expenses, missing deadlines, or failing to follow grantor rules can lead to findings, funding clawbacks, or reputational damage. Strengthening your grant management processes reduces risk and improves relationships with funders. The following tools can help add rigor and standardization to grant compliance and reporting:

• Centralized Grant Tracking Systems
  Use integrated tools to track real-time deadlines, reporting metrics, and budget usage. Avoid managing grants in multiple spreadsheets or emails, which can increase the chance of oversight.
• Understanding the Funding Source
  Recipients of grant funding should work with grantors to ensure the ultimate source of funding is clearly identified and understood to avoid any potential ramifications. (i.e. If the funding received is actually pass-through funding from the federal government.)
• Ensure Program and Finance Teams Collaborate
  Align reporting expectations across departments so that program delivery and financial tracking reflect the same results. Shared accountability helps avoid miscommunication during audits.
• Review Restricted Fund Usage Regularly
  Monitor restricted donations and grants monthly to confirm funds are used as intended. Regular reviews reduce the likelihood of reclassifications or corrections during the audit.
• Document All Grantor Correspondence
  Maintain a record of communication with grantors, including reporting clarifications and deadline extensions. This transparency can protect your organization if questions arise during the audit.

5. Engage an Audit Advisor, Not Just an Auditor

Working with an audit team that understands your mission, funding model, and operations makes all the difference. Many non-profits view their auditor as a once-a-year requirement rather than a year-round resource. However, organizations that treat their accounting firm as a strategic partner gain more than a clean opinion—they gain insight, education, and guidance.

Engage your audit team outside of fieldwork to discuss industry changes, reporting trends, and organizational changes and growth. Advisory-oriented firms can help evaluate your internal controls, review board governance practices, or even weigh in on new funding agreements before they’re finalized.

These touchpoints can help you avoid common pitfalls and bring best practices into daily operations. In short, the more integrated your advisors are, the more value you’ll see across your organization.

Your Mission Deserves a Partner, Not Just a Provider

Building donor confidence and minimizing audit risk are not seasonal efforts—they’re the result of year-round planning and long-term partnership. Non-profits that take a proactive approach to internal controls, grant management, and audit readiness are better positioned to earn funder trust and pursue larger opportunities. These efforts also promote stronger governance and greater financial clarity.

“’We are what we repeatedly do. Excellence, then, is not an act, but a habit.’ Regular financial account reconciliations, internal control review and standardized grant reporting that become part of an organization’s regular routine create a strong, transparent and reliable entity that both donors and employees can feel proud and confident to support and follow.” — Michael Sullivan, Managing Director, Tonneson + Co

At Tonneson, we don’t just offer one-time solutions—we become a trusted advisor invested in your organization’s long-term success. We work alongside you to reduce audit risk, ensure compliance, and build the financial confidence your donors expect. See how we can make long-term changes to your non-profit.