It’s that time of year again when a financial audit is on your nonprofit’s to-do list. Arghhh!!
Audits are financial reviews by a certified public accountant who examines financial records and business transactions and expresses an opinion about the truthfulness and accuracy of financial statements. Audits are time consuming and expensive, typically ranging from $10,000 to $20,000 depending on a nonprofit’s size, according to the National Council of Nonprofits.
The good news is your nonprofit may not need to undergo an annual financial once-over. And, if you want to show that your financial team is cracker-jack without straining your budget, you can undergo a less rigorous financial review or financial compilation.
Which financial report is right for your group? Read on.
Rhymes and reasons for an annual audit
Annual independent audits are one way to assure stakeholders that your financial statements are reliable.
Audited financial statements:
- Help management evaluate internal control systems.
- Inform financial institutions about a nonprofit’s liquidity and credit risk.
- Show tax authorities that tax returns are accurate.
- Put the reputation of the auditor on the line, an assurance that his opinion is valid and defendable.
Certain state laws and federal agencies require nonprofits that reach clear revenue or federal funds thresholds to undergo an audit. But if your group, say, receives less than $750,000 in federal funds in a single year, or is located in Colorado, which doesn’t require an audit, then you may not have to go through the hassle. And why spend $10,000 if you don’t have to?
Here are audit alternatives for small-to-midsized nonprofits.
During a financial review, an independent auditor reviews your financial statements to determine if they’re consistent with generally accepted accounting principals (GAAP).
Whereas an audit examines a group’s internal controls and looks at independent confirmation of financial information, a review merely looks for obvious deviations from GAAP and provides limited assurance that no substantial modification should be made to financial statements.
Accountants generally will compare prior and current year results, obtain bank statements, and question management about any unexpected results.
A financial review costs between 40% and 60% of a financial audit and typically is accepted by regional banks.
During a financial compilation, an accountant literally compiles financial records in an accounting-acceptable format, something that may help small nonprofits more easily explain their financial health.
During a compilation, a CPA makes no assurance that the records are accurate or that risk controls against embezzlement and fraud are in place. The compilation, rather, organizes or reformats records during a stated time period – month, quarter, year – in a way that allows an auditor to look for any obvious errors.
In a compilation report, the auditor does not offer an opinion about how well the financial records reflect the true financial position of a nonprofit. But the auditor can raise questions about certain numbers and put financial records in a format that can be easily reviewed and understood by outside parties, like lenders or investors.
A financial compilation is the least time consuming and costly type of financial review. Compilations typically cost $500 to $2,000 for reports without footnotes, or $1,500 to $5,000 for reports with footnotes.
Why conduct an audit even if you don’t have to?
If you have the time and money, you might want to undergo an annual audit anyway. Here’s why.
- An audit shows your organization is dedicated to financial transparency, something that helps board members, lenders, and donors sleep more soundly.
- Some foundations and donors require charitable nonprofits seeking funds to submit an independent audit.
- Some charity watchdogs take into consideration whether a group has an independent audit when rating the nonprofit.
The National Council of Nonprofits tells charitable nonprofits to discuss with trusted accounting professionals which financial reporting is best for their group.