Putting the FUN in Fund Audits: Fixing Underspent Funds and Honoring Donor Intent

I've shared this before, but because the philosophy resonates in so many areas of life I want to share again—I keep a paperweight on my desk that reads, "If you can laugh at it, you can live with it." 

And I firmly believe that laughter is, in many situations, the best medicine. It softens the blow of bad news, eases tension, and gives us a lift to keep going. And let's be honest—some days, all you can do is laugh, especially with some of the things that come our way at work.

Keeping this approach in mind, I even use it to try to put the "fun" in a fund audit. Yes, you read that right: I try to put fun in a fund audit. And while you might be rolling your eyes, stay with me.

All jokes aside, let's be real—the term fund audit doesn't exactly spark joy. For many, it sounds like a tedious, time-consuming, bureaucratic exercise in frustration. It conjures up images of endless spreadsheets, complicated donor agreements, messy paperwork, and more questions than answers.

And to be fair, those images aren't totally inaccurate.

But here's my challenge to you: what if we flip the script? What if we reframe the fund audit from being a burdensome task to a valuable opportunity? Because that's exactly what it is. When done thoughtfully, a fund audit can help us identify underspent funds, uncover hidden issues, and set ourselves up for greater long-term success. It's an opportunity to ensure we're being the best stewards while honoring donor intent.

Here are three compelling reasons why your organization should complete a fund audit—and why it doesn't have to be as painful as you think:

1. To get your "house" in order.  It's essential to have your recordkeeping in order, both in general and in preparation for a campaign, as this adds additional funds and makes fund management even more critical. And to get your house in order, you'll need to address things like: Do you have fund documentation on file? Think gift agreements, letters of intent, and memos of understanding. Are the documents signed by the donor? If the answer is no to one or both of these questions, what are the next steps? You'll likely need to create a memo to file or follow up with the donor. Another housekeeping area to review is whether the documentation naming conventions are consistent in your CRM or other systems. If not, then a clean-up is needed. While I don't find cleaning to be fun, a clean house sure feels good. With any of our recordkeeping—and especially for endowments, which will surpass all of our tenures at our respective organizations—it's best to implement and maintain a consistent naming convention for each type of documentation on file. In simpler terms, you shouldn't need to open a document to determine whether it's a gift agreement. The document "type" and naming convention should identify it as such.

   These small details may seem trivial, but they save time, prevent errors, and promote continuity—especially during staffing changes. Think of it this way: a fund audit shines a light on areas that need attention. And to stay on the bright side (we're bringing the fun, remember?), instead of seeing these findings as problems, view them as opportunities to improve. Getting your house in order today means fewer headaches tomorrow. These areas for improvement will benefit your organization for years to come, particularly during staffing and leadership changes. Speaking of change, another great reason to do a fund audit is....
   

2. To be prepared for change. If there's one constant in the nonprofit world, it's change. Programs evolve, departments merge, leadership shifts, and funding priorities adjust. Not to mention broader changes in education, healthcare, and other sectors that impact how we operate. In the midst of all this, our funds need to remain usable and aligned with donor intent. Logging fund criteria in a searchable, queryable field in our CRM is necessary; reviewing the use of fund criteria to identify problematic criteria is vital. From organizational changes such as programs closing, merging, or moving to different operational units to changes at the national level, we need to be able to quickly identify criteria that are, or have the potential to be problematic. And please know that "problematic" can mean the criteria are so restrictive, it's hard to use the money. (Put a pin here, as we'll come back to the topic of money later on.) Also,  problems aside, we need to know how we are allowed to use funds and how we must use our funds. We also need a method to obtain this information quickly, which is challenging when the criteria only exist in a scanned PDF. 

   Let's pause for a shoutout to our friends at Awarded, who've recently added a fund audit feature to their platform. The feature provides clients with instant access to scholarship fund criteria and utilization information at their fingertips. Genius! That's a game-changing feature for sure!
   

   When we identify criteria that are impossible, impractical, or even illegal to use, we have to remedy them. The remedy may involve communicating with donors or working with legal counsel to determine the best course of action regarding funds established through estate gifts.

   When programs cease to exist or merge into other units, the contingency clause in our agreements helps rectify what happens next. Contingency clauses often allow the funds to be redirected to another area that most closely resembles the original purpose, as determined by organizational leadership. Still, sometimes donors specify EXACTLY where the money should be redirected. We need to ensure we are aware of, and have properly flagged specific contingencies. 

   The careful review of criteria and contingency clauses, followed by the appropriate actions to remedy issues or get ahead of potential problems, is why every organization needs to do a fund audit. Capturing or tagging criteria in a searchable field—not just during the audit but through the creation of a sustainable process to do so consistently as new funds are established—prevents you from having to review documentation repeatedly. This sets up our organizations for resilience, flexibility, and success. And on the topic of success, let's move on to the jackpot of why we should conduct a fund audit...
   

3. To identify underspent funds. And once we’ve identified them, determine why they're underspent, and the necessary course of action to ensure the money is spent. Let’s be honest—what’s more FUN than finding money?! 

   It's the same as when you put on your coat for the first time since last winter and find $20 in the pocket. Eureka—free money! Except in this case, it might be $20,000, or even more. During a fund audit, one of the most eye-opening discoveries is the number of underspent or unspent funds sitting in accounts.

   Sometimes, funds go unused because we've forgotten we have them. Staffing changes or reorganization are often the culprits in these instances. Another reason for the lack of spending is that the criteria for using the money are overly restrictive. An all-too-common example in higher education is a donor from a small town or rural area who graduated from a highly specialized program with low enrollment, who establishes a scholarship for a student from the same hometown and major. If no one meets those criteria, the fund goes unspent.

   Once we've identified why little to no spending occurred, we must work to remedy the situation. It might be as simple as informing a unit that they have money to spend. It could mean working with the donor to identify less restrictive ways to meet their intended goal. In the scholarship example above, the ultimate goal might be to help a student with financial need. Whatever the reason and remedy are, we need to amend the terms of the agreement and document the change (refer back to point #1 about housekeeping and recordkeeping).

   It's also essential to create spending plans and policies to prevent underutilization in the future. Endowments, for example, make distributions to spendable accounts, not savings accounts. The money made available to us should be spent, and spent according to donor intent to support people, programs, and operational goals. Our organizations need to establish a policy that defines the amount or percentage of the distribution to be spent annually if it's not going to be used in full. In other words, we must establish parameters to avoid the accumulation of funds over time. The only way funds should accumulate is with the consent of the donor.

   Spending issues are a significant reason to invest time and resources into a fund audit. And it's non-negotiable before a campaign. We cannot, in good faith, return to donors in a new campaign and ask for more if we haven't been good stewards of what they havealready given. A fund audit ensures we're honoring our obligations, using resources wisely, and communicating transparently—all essential ingredients for successful long-term donor relationships.

Feeling exhausted or overwhelmed just thinking about a fund audit and where to begin? Don't worry, fund audits are a service DRG provides. Funny enough, some of us thrive on them. Give us a list of funds, and we'll bring the fun!

Written by Jan McGuire