If you’re the director or accountant for a nonprofit, you’ve probably wondered if you should get, or are required to get, an audit of your financial statements. What value is there in having one? Is it worth the cost of hiring a CPA firm?
The short answer is “it depends.” In some circumstances, you may be required to have an audit done. In other cases, it may not be a requirement, but could still be a good idea to get one. For some organizations, it doesn’t make sense to have an audit.
Certain organizations are required to be audited every year. Some states require it if you’re registered to operate or solicit contributions there. Massachusetts, for instance, requires nonprofits with more than $500,000 of gross support and revenue to submit audited financial statements with their annual filing, the Form PC. If you spend more than $750,000 of federal funding in a fiscal year, you’re subject to audit requirements in Subpart F of the Uniform Guidance (Supercircular). Other situations that could trigger an audit stipulation include loan covenants from a bank, foundations requesting audited financial statements as part of a grant proposal, and some contracts with state and local governments.
Even if an audit is not required, there can be value in having one. You’ll need to balance this against the cost, since it’s usually not inexpensive. A few benefits of having an audit include:
- Financial Transparency: It shows donors and funders that your financial practices meet accepted standards. Since it adds additional accountability, it can be reassuring that you’re willing to let outside accountants inspect your records. An unqualified audit opinion from your CPA provides confidence in the accuracy of your financial statements, which reassures donors and grantors.
- Compliance: A CPA firm with experience in nonprofit accounting can confirm whether you’re recording things correctly and train you in best practices. This is especially true if you’re organization is complex, or has nuanced grant terms or reporting needs.
- Ratings: Organizations that rate nonprofits, such as CharityWatch and Charity Navigator take into account whether charities have an audit, in addition to whether they follow best practices.
Maybe you’re in a position where you’re interested in having an audit, but you’re not sure if you can afford it, or if the benefits are worth the cost. You may want to consider less expensive alternatives. CPA firms can also perform reviews, which are less in-depth than audits, and the firm doesn’t issue an opinion on your financial statements as they would in an audit, except to say whether anything came to their attention that would lead them to believe there are material misstatements. Below reviews are compiled financial statements. In this case, the CPA firm puts together your financials based on the data you provide. CPAs cannot audit or review financials that they compile, so their report will not issue an opinion or assurance about them. Reviews are substantially less expensive then audits, and compilations are again less expensive than reviews.
A final option for working with a CPA firm are “agreed upon procedures.” This can take a variety of forms, depending on your needs. The firm will work on a subset of your accounting data and issue a report detailing the work they did, and the results. For instance, if a funder is requiring an audit as a condition of a grant, you can ask if it’s sufficient to audit specifically the funding they provide, rather than your entire organization. The cost of these procedures will vary based on the nature and extent of the work, but will often be more affordable than a complete audit. In conjunction with a review or compilation, they can provide some of the same transparency and assurance to your constituents that you may have sought in an audit.
Alternatively, this article from Nonprofit Quarterly looks at the benefits you get from having an audit and other avenues you can use to achieve the same goals. Solid accounting and financial practices, along with transparency, can go a long way in building trust with constituents outside your organization who rely on your financial information.
If you’re going to have an annual audit, it’s a best practice to have an audit committee on your board of directors, or other governing board. This committee would be responsible for:
- Selecting and hiring the firm to perform the audit
- Meeting with the auditors before the work starts, and after it is completed to review the financial statements and the auditors’ findings
- Presenting the findings to the board of directors as a whole; the board as a whole accepts the work of the auditors
Audit committee members should be independent of the accountant(s) or bookkeeper(s) who handle the day-to-day accounting and prepare the financial statements and should have a solid understanding of accounting principles and internal controls.
If you decide to have an audit or other procedures, your next step is choosing which CPA firm to hire. In an upcoming post, I’ll cover what you should look for and factors to consider in your search.