Every day we hear questions and concerns from people in the nonprofit community about financial reporting. Some common questions are:
- Do all nonprofits need to have an independent audit performed on their financial statements?
- Are there any more affordable methods of evaluating a nonprofits’ financial position, rather than an independent audit?
- Is there any reason to have an independent audit performed if it is not required?
- Will having an independent audit uncover fraud?
- Is there a deadline for the completion of an independent audit?
- Are all nonprofits required to have an audit committee to oversee their independent audit?
Let’s take a look at these questions one by one:
Do all nonprofits need to have an independent audit performed on their financial statements? No. Circumstances that may trigger the requirement for an independent audit include:
- Federal, state and/or local government funding agencies may request a copy of the audited financial statements.
- Banks may require an audit to be prepared as a condition of receiving a loan.
- Some state governments may request an audit in order for an Organization to provide services in a community.
- Many states require a copy of their audited financial statements when they register with that state for charitable/fundraising purposes.
- Organizations that expend more than $500,000 or more in federal funds each year are required to undergo a Single Audit in accordance with OMB Circular A-133 Audit.
Are there any more affordable methods of evaluating a nonprofit’s financial position, rather than an independent audit? Yes. A review or compilation of an Organization’s financials can be performed. Don’t hesitate in asking the grant funder, bank or state government if they would accept a lower level engagement in lieu of an audit. A review has the same goals as an audit; however, it is not conducted with the same level of investigation or analysis as an audit. A compilation is merely the compilation of an Organization’s financial records into a format required by accounting standards. The auditor’s only requirement in a compilation is to assess whether the records are free from obvious errors.
Is there any reason to have an independent audit performed if it is not required? Yes. Conducting an independent audit helps to demonstrate an Organization’s commitment to financial transparency. A non-profit can build its reputation with the public by having an audit prepared and making it available to the public either on their website or upon request. This level of transparency can help to convince donors to contribute to an Organization.
Will having an independent audit uncover fraud? Not necessarily. Independent audits may help to prevent potential fraud but audits rarely detect fraud. Audits do not guarantee that an Organization is free from fraud; audits only provide reasonable assurance that the financial statements are free from material misrepresentations. Implementing strong internal controls and educating employees to identify fraud is the key to preventing and detecting fraud.
Are all nonprofits required to have an audit committee to oversee their independent audit? No. There needs to be board oversight for the audit function, but it is fine to use another committee or the full board to provide this oversight. The board is responsible for ensuring that an audit is conducted and to oversee the process, including hiring and evaluating the independent auditors.
Is there a deadline for the completion of an independent audit? This answer depends on the reason for having an independent audit. Grantor agencies and banks will often have a date by which they want a copy of the audited financial statements to them. This is often 120 days after the end of the Organization’s year-end. Many states also require copies of the audit reports be filed by the filing deadline (with extensions) of the state information return.
If you have any questions about this article, or would like to discuss your nonprofit, please contact us at (908)782-7900 or email firstname.lastname@example.org.