By Jennifer Coleman, CPA, CFE
There is no doubt that conducting an independent audit requires time and resources for a nonprofit organization. However, it is not a task that most nonprofit boards could or should bypass without serious consideration. Many nonprofits are required to hire a qualified, licensed CPA to conduct an annual independent audit for various reasons. For example, charitable nonprofits that expend $750,000 or more in federal funds in a year are generally subject to single audit requirements. In Florida, charitable organizations with annual contributions of $1 million or more are compelled to conduct an independent audit. Other organizations are bound by stipulations in government grants or contracts requiring independent audits.
However, assuming your organization isn’t required to conduct an independent audit, don’t assume you should cross “audit” off your board’s activity list and move on. There are valid reasons you might want to consider an audit or one of its alternatives.
Three “Other” Reasons to Conduct an Audit
If your nonprofit is not required to have an independent audit, there are reasons why the organization might choose to hire a CPA to perform one.
Financial transparency. Large donors have come to expect nonprofits to be candid with financial information. Providing access to independently verified financial information about your nonprofit’s finances and financial management inspires confidence in your organization. While this might not be sufficient cause for an annual independent audit, a periodic audit that can be shared with large donors and foundations is desirable.
Reputation. Popular charity watchdogs (think GuideStar, CharityWatch & Charity Navigator) consider whether a nonprofit has an independent audit in their rating systems. This affects ratings even if an independent audit isn’t legally required for that organization.
Financial opportunity. Banks will often require audited financial statements prior to issuing a loan. Many organizations and foundations require audited financial statements for certain grants. Even when it is not explicitly required in a grant application, the ability to provide audited financial statements can improve your organization’s appeal in the grant-making process.
Three Alternatives to the Audit
Whether your organization is looking to improve its transparency, charity ranking, or fulfill a potential donor’s request, there may be options that satisfy your nonprofit’s current need that are more economical than an independent audit.
A financial review is conducted by an independent CPA who will review a nonprofit’s financial position and statements of activities, functional expenses and cash flows. The CPA will seek assurances that the financial data is compliant with Statements on Standards for Accounting and Review Services, issued by the American Institute of Certified Public Accountants, but will not exercise the same level of investigation and analysis as in an independent audit. There is no review of internal controls and the review report will not provide a professional opinion about the nonprofit’s financial statements as a whole. The report will provide limited assurance as a basis for reporting whether there are any “material modifications” that should be made to the financial statements for them to be in accordance with generally accepted accounting principles.
A compilation is a report of a nonprofit’s financial position in a format that meets standard accounting expectations, making it easily shared. It generally provides statements of financial position, activities, functional expenses, and cash flows. It’s prepared by an accountant but offers no opinion or assurances about the accuracy of the financial information or the organization’s internal controls and compliance with generally accepted accounting principles. Compilations can be helpful to organizations who need a polished presentation of their financials for review by a bank, agency or potential donor. It can also reveal where organizational accounting is not meeting standard reporting expectations, as the accountant conducting the compilation requests records or financial information.
An Agreed Upon Procedures (AUP) is a report by an independent CPA that focuses on limited subject matter and applies audit-like scrutiny on that subject alone. The terms of what will be analyzed and tested are agreed upon in advance by the CPA and organization. Hence the name. The report will include all procedures and findings. The CPA will not express an opinion in his or her report. However, it can help an organization fulfill a specific requirement by a funding partner such as a grantor who wants a report demonstrating where grant funds were used.
If your nonprofit organization has been asked to fulfill a specific request for financial information, talk to the organization requesting audited statements to see if one of these audit alternatives will suffice.
If none of the above options seem feasible or necessary, and your nonprofit is confident it is not required to conduct an independent audit, there is one other option for your board to consider—a self-audit by your audit committee.
Having an audit committee or task force is considered a best practice for nonprofit governance. Even nonprofits that hire independent auditors will use an audit committee to oversee the process and the implementation of any audit recommendations. The members of the audit committee should be as independent as possible, which means the group should not include any of the charity’s employees, nor the board president or treasurer. However, the committee members should have a strong background in finance because they will need to examine the nonprofit’s transactions, records, and internal controls in detail. A self-audit does not carry the same weight as an independent audit, review, compilation, or AUP, but it is the minimum a nonprofit can do to reassure the public of its financial management.
An audit increases confidence of government agencies, insurers, banks, donors, grantors, and any other potential supporters. A nonprofit board would be remiss to not consider all the options available to them to demonstrate their commitment to sound financial management and transparency.
Jennifer Coleman, CPA, CFE is the assurance and quality control partner of Myers, Brettholtz & Company, PA. She is a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants and is certified in Fraud Examinations.