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Why Nonprofits Need Audits—Even When They Are Not Required

Depending on a nonprofit organization’s annual gross receipts and other factors, the organization may be required by state regulation to hire an external certified public accountant (CPA) to audit its books and records. Even when external audits are not mandated, however, they often are recommended. Audits can provide assurance that an organization is operating with integrity and is using acceptable accounting guidelines. Such assurance is often relied on by banks for financing decisions and by donors for gift-giving determinations.

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Mandate or Not

Generally, an organization that expends more than $500,000 in federal funding over the course of a fiscal year must engage a qualified CPA to perform an independent audit. In addition, states often impose their own guidelines. In California, for example, nonprofit organizations with more than $2 million in annual gross receipts must file independently audited financial statements; in Tennessee, that threshold is only $500,000. In many states, the law remains silent on the issue.

If the organization is not subject to any mandates for an independent audit, one of the staff or board members should regularly perform internal reviews of the financial statements and accounting policies. Such reviews promote fiscal responsibility and are essential to good governance, but do not necessarily arrive at similar conclusions. After all, those reviews are often conducted by people who may not have had extensive audit training and experience and who have a vested interest in issuing a “clean bill of health.”

Outside Advantage

The financial statements generated by an organization for its public and private supporters, its government filings, and its licenses must offer a fair picture of its finances and adhere to recognized generally accepted accounting standards. Each organization is challenged by the competition for a limited pool of resources, whether it be government funding or donor support. To best meet that challenge, it is very important for an organization to be viewed in a positive light when benchmarked against similar entities. It is essential that the organization ensures its accounting policies and procedures are comparable to those of its peers. The audit process delivers on that key concern.

Unique characteristics of an organization that may otherwise cause its profile to veer from normal benchmarks can be addressed in the reporting process. The auditor's years of experience in the industry will serve to promote appropriate adjustments or disclosures of such anomalies to shed the best light on the organization as a whole.

After completing the audit fieldwork, an auditor will issue a formal opinion about the fairness of the organization’s financial statements and, in most cases, will meet with the board’s audit committee. Be sure to take advantage of this opportunity to ask questions and discuss specific issues raised by the audit process, as well as any recommendations the auditor has made about improving operations, accounting processes or internal control procedures. Often free-flowing in nature, these discussions provide the organization and its leadership with valuable insight that will reap significant benefits in the areas of internal controls and unrelated business income tax.

No Substitute

Internal processes and procedures are essential to the functions of the organization, but they are no substitute for an external audit performed by a qualified CPA. Even if an organization is not required to submit audited financial statements, the process leading to the issuance of the independent auditor’s report is sure to reap benefits for the organization now and in the future.

©2014

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