Seeking Advice on Non-Profit 990 Discrepancies

[ILLMAS]

I’m working with a new non-profit client that previously had a rocky relationship with their CPA firm. Unfortunately, they were unable to obtain complete QuickBooks files and reports, leading to an attorney's involvement to retrieve the missing records, but they received only incomplete information.

As a result, I had to recreate the books using bank statements. However, when I compared the financials to the 990's from 2017, 2018, and 2020, I found significant discrepancies. Specifically, the income and expenses reported on the 990s appear to be overstated compared to my reconstructed books.

I feel confident in the accuracy of my work, but it’s crucial for the financials to align with the returns. Given that the client relied completely on the previous firm and is unaware of these discrepancies, I’m in a bit of a pickle.

My question is: Should the 990s be amended to reflect the accurate financials?

I’d greatly appreciate any insights or experiences you might have on how to navigate this situation.

[Medlin Software, Dennis]

i have been through this several times, and because of it, I do not get involved in management or reporting any longer, not even the group we are personally involved with (volunteer). My suggestion is to consider setting up a new entity and let the old one die off. With the litigation and other issues which may yet to surface, keep clean of that end. It may well be the old entity has no assets or is allowed to transfer to a successor or similar.

My first one was a club which had done events and fundraising since at least the 1930's. Somewhere in the 70's, the members ignored any paperwork and reporting. I came along on the 80's. The issue for me, was the events were causing significant liability to those putting on the event, and I insisted on doing things correctly. That is when the issues were discovered, counsel retained, and the start clean advice was given and taken to heart.

[BulldogTom]

You said yourself that you are working with incomplete information.   That leads me to believe that the bank statements are not the only source documents (I could be wrong, just my hunch).   I would hesitate to amend returns that I am not sure I have all the data and documentation for.  How would you defend it if the IRS decided to audit the returns? 

What I would do, if you want to keep the client, is ask the client to give you a letter indicating that I can rely on the work of the prior accountant.  Get the prior year financials and returns, make your prior year financials look like the reported financials and returns and move forward with your work in the current and future years.

I hate these situations, but I caution you about making it worse unless you are absolutely certain you have all the source documents to make any changes.

Tom
Longview, TX  

[BulldogTom]

10 minutes ago, Medlin Software, Dennis said:

 My suggestion is to consider setting up a new entity and let the old one die off. With the litigation and other issues which may yet to surface, keep clean of that end. It may well be the old entity has no assets or is allowed to transfer to a successor or similar.

Did not think of that one.   It may or may not be feasible but it is worth exploring the idea.

Tom
Longview, TX

[Medlin Software, Dennis]

Easy if no significant assets or if solid end of life transfer terms in place. 

[Medlin Software, Dennis]

In my case, the entity had no substantial assets, so a die/start over had no consequences, and was MUCH cheaper than a cleanup.

In another case where I was hands off, the old entity had debt, and the new entity paid the debt as a human kindness, cleared though their attorney to be allowed.

In what may be coming in the next few years, an entity will have enough assets to make continuation worth doing. Those who are running it are getting older and less interested, and no one wants to step up as is, but there will either be a new entity, or a similar entity which the assets can be transferred to.

[jklcpa]

I agree with Bulldog Tom in that your work may also be an inaccurate recreation using only the bank statements if what was retrieved from the prior accountant and client was incomplete data.

By using only the bank statements, then it seems you are recreating using cash basis. Is that the basis used for the prior 990s and financials?  If the NP used accrual basis, that would be a possible explanation why the revenue and expenses could be higher than your recreations. Are the 990s and financials presented on the same basis of accounting? 

I generally don't amend a predecessors work without knowing I have all of the data. To do so from incomplete data, there is no way to know that your work is any more accurate than what you are amending from.