Greater benefits require greater transparency, and the tax-exempt status of nonprofit organizations puts them at greater odds of an audit. The scrutiny required of a nonprofit’s finances and accounting is part of the trade-off for being a tax exempt organization. Donors and members trust you to fulfill your organization’s mission using their money, and in return, they expect reasonable use of their funds and clear reporting of how that money is used.
Who Requires Audits?
Depending on your organization and how it is funded, you may be required to perform a federal or state audit. The National Council of Nonprofits provides a list of states requiring an audit. This list changes frequently, so please check back with your state or your accounting firm for the current regulations.
Nonprofits that receive federal funding during a fiscal year that exceeds a certain amount (which can change annually) should keep an eye on whether or not they need an audit. Chances are good that you should have an independent audit conducted. Learn more about this requirement from the National Council of Nonprofits.
Preparing for an Audit
Preparing for an audit is a combination of common sense and detective work. Your goal should be to provide as much accurate documentation to the auditors as possible in a timely fashion so that they can go about their work without delay.
To prepare for an audit, you should:
- Draft an engagement letter, which specifies the details of the independent audit that you have commissioned.
- Meet with the auditing firm to ensure mutual understanding of goals, expectations and timelines.
- Organize documents required for the audit.
- Prepare folders for the auditors that include pertinent documents.
- Read the “prep pack” provided by the auditors if they include one. A prep pack provides background on what you need to do to prepare for the audit.
- Identify staff contacts for the auditors.
- Schedule a meeting to brief the staff about the audit.
After the Audit: What to Expect
Depending upon the timeline you’ve set for the audit, you should receive the auditor’s report within a reasonable amount of time after the audit itself is completed.
The audit review committee, board of directors and senior staff should meet to review the initial draft of the audit. You can provide consolidated feedback, and request clarification of any findings. Then, the final audit can be prepared.
A good audit will identify any internal weaknesses or problems with compliance to generally accepted accounting standards and rules for nonprofits. Review the issues uncovered during the audit, and prepare a plan to respond and correct and problems. Operating inefficiencies discussed in the audit documents should also be thoughtfully considered and corrected.
An audit may not necessarily uncover evidence of fraud, although inefficiencies and problems may point to fraud. It’s up to your staff and board of directors to follow through on any issues described in the audit.
A formal presentation of the audit report closes out the process. The board of directors and management may offer suggestions to fix any issues, which can be included in the auditor’s report.
Is It Time for an Audit?
Audits are an important component of proper nonprofit management. An audit shouldn’t be viewed as a burden, but rather a chance to improve your operation’s management and ability to fulfill its mission.
An upcoming webinar will discuss how the demands on nonprofit finance teams have continued to increase. Also, how you must create greater levels of transparency and visibility, enhance the governance of the organization, and strengthen decision-making and strategic focus – all while improving productivity. Click here to register for the Survival Guide for Nonprofit Finance Teams Webinar on Thursday, June 23rd at 11 AM PT/2 PM ET.
The team at Beck & Company can provide the expert insights into your finances and operations to help your nonprofit grow and thrive. Founded in 1987, the CPAs and consultants at Beck & Company understand the complexities and nuances of the nonprofit world. Please contact us at 703-834-0776 for a consultation.