How to get through a nonprofit audit without the stress.

Here’s what nonprofit audits are, what they’re not, and where you should focus your energy.

‍

Audits are a necessary although somewhat stressful part of a nonprofit organization’s business. A good audit report can provide donors and/or members with a strong, positive feeling about the organization; a not-so-good audit can cause considerable problems. Think of it simply as an inspection that makes sure key areas in your finances are working correctly.

But for those whose mission is to lead a nonprofit—including raising funds and promoting their cause—the specifics of an audit can often seem mind-numbing. Few are well-versed in the ways of accounting so don’t feel like you’re not understanding something you should.

What follows is a basic look at what audits are — and what they are not — and where you need to focus your energies. If you’d like to read our complete guide, How to Keep Your Nonprofit Audit Clean, we invite you to download it here.

Start with the right auditor.

It’s essential to choose an independent, third-party audit firm with a solid reputation to do the work — and make certain the auditor is licensed in your state. The accounting firm at a minimum must be certified to provide an independent opinion as to whether the organization’s financial statements and records comply with accounting standards. Not all audit firms are created equal. That’s why it’s imperative that you do detailed research on firms and find ones that specialize in your nonprofit area. Doing that will help ensure that the audit is thorough and efficiently done. (“Independent” means that the audit is not completed by Board Members or employees of the organization, even if they’re qualified or certified to do it.)

When are audits required?

Federal, state, or even local governments may require an audit or at least request a copy. Organizations that spend more than $750,000 a year in federal funds are also subject to specific additional, specific audit requirements as called for by federal regulations. State laws and regulations my also require audits in certain cases.

Also, some private foundations require that grant applicants and recipients submit audited financial statements (or certified financial statements) in order to be eligible for funding.  

Should you have an audit done, even when it’s not required?

There are several key reasons to have an audit performed:

• It demonstrates that the organization is committed to transparency and accountability and stewardship of the funds entrusted to it

• It inspires donor trust and helps maintain that trust
• It helps the board have confidence in the organization’s finances

But maybe you don’t need to do an audit.

Many nonprofits are operating on extremely limited budgets. Audits can cost upwards of $10,000 - $20,000 or more — and that doesn’t include the time spent by staff preparing for the audit or working with auditors. If your organization is not required to do an audit, you can show donors that you’re committed being financially transparent by doing a more affordable option such as a review or a compilation.

A review provides the same basic answers as an audit but the investigation is not nearly as comprehensive. (See #3 below.)

A compilation is simply a collection of financial records organized in a format that meets accounting standards. If this is performed by an independent auditor, those standards require the auditor to determine if the records are free of obvious errors.

Not all audits are about finances.

‍

1. Financial Statement Audit

The most common audit examines and reports on the financial statements to determine if they conform to standards. The organization receives a high, but not absolute, level of assurance that its financial statements are free from material misstatements. It provides a conclusive opinion on the fairness of the nonprofit’s financial statements.

2. Compliance Audits (also known as a “single” audit)

This type of audit reviews federal awards received by the organization. For example, an audit is necessary when a nonprofit spends $750,000 or more of federal funds in one fiscal year or is required by state or federal laws. The audit will also assure that the organization is in compliance with specific government regulations or laws that apply to a specific federal funding source. Compliance audits are typically accompanied and supported by a financial audit.

3. Independent Review  

A review provides limited assurance that the organization’s true financial picture doesn’t vary significantly from the information they have provided — but does not conduct an examination of the nonprofit’s internal controls or other areas. This type of audit can create trust in donors but generally doesn’t meet the level of depth required by federal and state regulations.

4. Project-specific Audits (also known as “agreed upon procedures” audits)

An agreed upon audit procedures audit is tailored to meet the specific needs of a nonprofit organization. It is an independent review of a specific component or internal control system within the organization. For example, testing internal controls and documentation procedures. Like independent reviews, this kind of audit does not meet the level of assurance required by federal or state regulations.

What about state and local laws and grant awards?

Some states require nonprofits that receive certain levels of state funding to submit independent audits to the state agency providing the funding or other specified state agencies. There are also states and local governments that contractually require audits.

In addition to an audit, many states require charitable nonprofits to submit a copy of audited financial statements in conjunction with the process of registering and reporting as a nonprofit. The purpose of this filing, often referred to as an “annual charitable nonprofit registration”, is to ensure that the organization is operating in compliance with state laws and regulations.

If you’re not sure what your state requires, you can visit the National Council of Nonprofits to get a general idea. You’ll need to work with your audit firm to determine that state’s specific requirements for your organization.

Are audits supposed to uncover fraud?

That’s a common misconception. Audits rarely detect fraudulent activity such as embezzlement. However, you can hire an outside forensic auditor to complete a deep dive meant to identify any fraudulent behavior and risk factors in your organization. Your auditors and Veracity Pros  can also provide you with detailed information, tools, and strategies that can better protect your organization against fraud.

To learn more, talk with Veracity Pros.

From choosing the right independent auditor to preparing for an audit to understanding the results, we can help you make the right decisions for your nonprofit.

If you still have questions about nonprofit audits or any other financial issues, please contact us at hello@veracitypros.com

‍