Nonprofit organizations play a vital role in our communities, but they also carry a significant responsibility for financial transparency. One crucial aspect of this transparency is the financial audit. In this year particularly, when both grants and donors are stretched thin, you may see more calls for audited financials from funders. At a very basic level, an audit protects the donor, the organization, the staff, and the recipient of the charitable works. The donor may care about how much of their donation that makes it to the intended purpose, the organization benefits from identifying weaknesses in their processes, and when the entire financial process is carefully protected, staff are protected from accusations of fraud, errors, or omissions.
First, some quick definitions:
Audit: A formal examination or review.
Compliance: Adhering to all relevant rules, guidelines, and conditions. In addition, documenting, reporting, and monitoring of same in a way that ensures accountability and transparency in the use of funds and execution of the granted enterprise.
Financial Audit:A financial audit is an independent examination of a nonprofit’s financial statements by a Certified Public Accountant (CPA). Essentially, it’s a check-up on the organization’s financial health and accuracy of its financial statements..
Fraud: In financial accounting, fraud is the intentional manipulation of financial statements to give a false sense of financial health or to obscure theft.
Generally Accepted Accounting Principles (GAAP): The accounting standard adopted by the U.S. Securities and Exchange Commission (SEC), and is the default accounting standard used by companies based in the United States.
Key Triggers for a Nonprofit Audit:
While the need for an audit can vary, here are some common situations where a nonprofit should consider having an audit or is required to undergo one:
- State Requirements:
- Many states have specific thresholds for nonprofit audits, often based on annual revenue.
- In NH revenue, gains, or other support of $2,000,000. or more triggers a requirement of an audited financial statement prepared by an independent CPA.
- MA requires one at $500,000. but does not calculate capital gains in that figure.
- VT does not currently have a requirement for an audit based on revenue.
- Federal Grant Requirements:
- If your nonprofit receives federal grants of $750,000. or more you may be required to undergo an audit that includes independent financial assessment and compliance to all applicable laws, rules, and specific guidelines for the granting opportunity.
- Foundation or Funder Demands:
- Banks or other lending institutions may require an audited financial statement before providing loans or lines of credit.
- Similarly, major donors or foundations might request an audit to ensure their contributions will be used responsibly.
- Internal Bylaws or Policies:
- Some nonprofits establish internal policies that mandate regular audits, regardless of external requirements. This demonstrates a commitment to transparency and accountability. This is more common in larger nonprofits or with those that handle cash, or have other risks to address.
- Significant Growth or Change:
- Rapid growth, significant changes in operations, or mergers can trigger the need for an audit to ensure financial controls remain effective.
- Addressing Concerns or Suspicions:
- If there are concerns about potential fraud, mismanagement, or financial irregularities, an audit can provide an independent and thorough investigation.
- Best Practices and Transparency:
- Even if not strictly required, a nonprofit may choose to conduct regular audits as a best practice. This builds trust with donors, members, and the public, demonstrating a commitment to financial accountability.
How much does an audit cost?
Of course, this is “it depends.” The complexity and scope of the non-profit financial situation, the specific compliance requirements depending on the regulatory agencies, and the amount of resources needed to perform the audit will reflect in the cost of the audit. Greater chances for errors or fraud, such as cash handling, or large amounts of debt on file, can also make the audit more expensive. A CPA who specializes in non-profit organizations will be able to determine your situation accurately and likely have an overall lower cost than a CPA who isn’t as familiar with the process. As a very rough estimate, plan on between $5,000-$10,000. for a first audit.
Why Audits Matter: Why would a funder request an audit of a nonprofit?
- Enhance Credibility: Audited financial statements increase trust among stakeholders.
- Improve Financial Controls: Audits can identify weaknesses in internal controls and recommend improvements.
- Ensure Compliance: Audits help ensure compliance with relevant laws and regulations.
- Facilitate Fundraising: Audited financials can make your organization more attractive to potential donors.
- Provide Peace of Mind: Audits offer assurance that your organization’s finances are in order.
Key Takeaway:
Don’t wait until you’re mandated to have an audit. Proactive financial management, including regular internal audits, can strengthen your nonprofit and ensure its long-term sustainability. Clear and precise bylaws, processes and procedures in all financial transactions will make the process of an independent audit less expensive, and less stressful. Always consult with a qualified CPA and review your state and federal requirements to determine your specific audit needs.
For more information see these resources:
https://eltcpa.com/ultimate-guide-understanding-non-profit-audit/
https://lifeboataccounting.com/index.php/blog/an-introduction-to-internal-controls