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 makes it to the intended purpose. The organization benefits from identifying weaknesses in its processes. And when the entire financial process is carefully protected, staff are protected from accusations of fraud, errors or omissions.
Some Quick Definitions
Audit. A formal examination or review.
Compliance. Adhering to all relevant rules, guidelines and conditions — plus documenting, reporting and monitoring them in a way that ensures accountability and transparency in the use of funds and the execution of the granted enterprise.
Financial audit. An independent examination of a nonprofit’s financial statements by a Certified Public Accountant. Essentially, a check-up on the organization’s financial health and the accuracy of its financial statements.
Fraud. In financial accounting, 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, and 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 common situations where a nonprofit should consider having one — or is required to undergo one.
State requirements. Many states have specific thresholds for nonprofit audits, often based on annual revenue. In New Hampshire, revenue, gains or other support of $2,000,000 or more triggers a requirement for an audited financial statement prepared by an independent CPA. Massachusetts requires one at $500,000 but does not calculate capital gains in that figure. Vermont does not currently have a revenue-based audit requirement.
Federal grant requirements. If your nonprofit receives federal grants of $750,000 or more, you may be required to undergo an audit that includes an independent financial assessment and compliance with 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, and 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 practice. 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.
How Much Does an Audit Cost?
Of course, it depends. The complexity and scope of the nonprofit’s financial situation, the specific compliance requirements from regulatory agencies, and the amount of resources needed to perform the audit will all be reflected in the cost. Greater chances for errors or fraud — cash handling, or large amounts of debt on file — can also make the audit more expensive.
A CPA who specializes in nonprofit organizations will be able to assess your situation accurately and will likely have a lower overall cost than a CPA who isn’t as familiar with the process. As a very rough estimate, plan on between $5,000 and $10,000 for a first audit.
Why Audits Matter
Why would a funder request an audit of a nonprofit?
- Enhanced credibility. Audited financial statements increase trust among stakeholders.
- Improved financial controls. Audits identify weaknesses in internal controls and recommend improvements.
- Compliance. Audits help ensure compliance with relevant laws and regulations.
- Easier fundraising. Audited financials make your organization more attractive to potential donors.
- 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.