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.
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 $1 million per year in federal funds are also subject to specific additional, specific audit requirements as called for by federal regulations. State laws and regulations may 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.
