One of my favorite people in the whole world is the founder of the school that my children attend. It's called Trinity Christian School. When she founded this organization over 48 years ago, she was way beyond her time. She saw an opportunity to create a parenting school that was built on the foundational beliefs of kingdom education. Well, one of her guiding principles was something I want to share with you today, which is, “Inspect what you expect.” 

     When I think of this simple statement, “inspect what you expect”. I think about how important it is for nonprofits to have an audit. An audit, in this context, means a financial statement audit by an independent CPA that can ensure transparency and accountability and can be used to create opportunities for better financial health.

With that end goal in mind, here’s my pro tips on how prepare your nonprofit for an audit:

1. Prepare thoroughly

     First, I want to remind you to prepare thoroughly. Ensure that all your financial records, documents, receipts, and invoices are organized and accessible. Maintain clear financial policies and procedures, and then make sure that what you say is happening is actually happening. 

2. Engage an Experienced Auditor

     So, how do you engage an experienced auditor? Look for a CPA firm with nonprofit auditor expertise. Trust me, I've seen what it looks like when they don't have nonprofit expertise. The report is not valuable. It does not provide the insight. It's really not even compliant with what the auditing standards require, so it's ultimately a waste of money. It’s definitely worth the cost to hire a nonprofit auditor with that particular specialty.

3. Update Internal Controls

     Let me start by clarifying that internal controls are not the auditor's job. So contrary to what it sounds like, an audit firm does not come into your nonprofit to audit your internal controls. They do have to assess them, which means they need to know enough about what they are and whether or not they could be working to design their audit procedures. So, if you have zero internal controls, the auditor will need to do more test work and they will have a lower level of reliance on what they've provided,  which can even impact their ability to provide an audit opinion at all. As auditors, we describe an audit as “clean” to indicate  whether or not we can rely on the financials. So it's your job, as a nonprofit leader, to make sure there are internal controls in place, and that you are mitigating the risks for fraud and errors. The stronger your internal controls, the more likely the auditor can rely on them, which can actually impact the auditor’s procedures, and ultimately impact the fees you pay for these services. Therefore, you should be reviewing your internal controls regularly. Just because you have internal controls doesn't mean they're working. So, as my great friend would say, inspect what you expect!

4. Prioritize Transparency

     Next, let's explore transparency. An audit really does create an opportunity to have a relationship with a professional that can create transparency in the financial transactions of your nonprofit. Make sure that you communicate often with your auditor that the lines of communication are open and freely flowing both ways. One of the ways I like to utilize an audit relationship is to give the auditor a call throughout the year. If I'm addressing something that has a unique estimate or an accounting entry that I don't normally record, I’ll reach out to the auditor to share with them what I'm thinking, what I'm proposing, and get their feedback on that situation. Your nonprofit auditor should definitely be a trusted partner with you in that transparency process. 

5. Look to Your Auditors for Guidance

      As you prepare for your audit, look to your auditors! They should give you a list of the required schedules and detail work that you should prepare. You’ll want to use that as a guide. As I shared above,  you’ll also want to dive into your own internal review of your processes and financial statement reports to make sure you've identified any concerns prior to the audit beginning. One of the ways I do this is through a prior year/current year comparison. Very often, concerns will stand out there. Your budget to actuals can also help you to see if there's anything that may need to be resolved before your audit begins.

6. Understand and Implement Recommendations

      It’s so important you understand and implement the auditor’s recommendations. Auditors will provide two types of recommendations- formal and informal. Take those as nuggets of truth to help you improve as an organization. Address any weaknesses or opportunities for improvement that are identified by your auditor throughout the process. As mentioned above, engage the auditor in the conversation. Maybe there's a situation in your organization that has you wondering, “Is this the best way to do this?” Directing questions like this to your auditor is a always a good idea. Now, if you don't have an audit firm that provides that level of interaction, that may be an indicator that you should make a change. 

7. Foster a Culture of Compliance

     Having an audit actually sends an incredible message to your staff, board, donors, and all of those that you have interactions with. It communicates to them that financial policies, procedures, and stewardship are incredibly high priorities to you. An audit openly communicates the truth of what you've accomplished with the donors who have funded the mission and with those that are on your team so that they know you're committed to that culture of accountability. 

8. Report Your Findings

 There are many different ways to report your findings depending on how your organization's communication rhythms work. It’s important to inform stakeholders, including your board of directors, your donors, and any regulatory or granting agencies, of the status of your audit. Let them know you've achieved a clean opinion or that you've completed your audit for the year. It’s also wise to share your audit status with your bank or any organization that you have borrowed money from.

9. Use Audit Results Constructively

     Next, we want to use those results from the audit constructively and strategically. One of the best ways to do this is by utilizing a report in your audit called the Statement of Functional Expenses.

I love this statement because the information is communicated differently than your internal monthly financials. In this statement, the auditor takes all expenses and allocates them into categories including programs, general, administrative, and fundraising. Within the program umbrella, you often find things broken out by major programs or by the significant things you do. This can really help you to see what the cost is by program and make some strategic financial decisions based on that high level data. 

     The Statement of Functional Expenses also presents expense types by line item, such as office supplies or utilities. This gives you greater insight into expenses by their categories and you can compare them amongst the list to see if there are opportunities  to increase efficiency in the next year. 

10. Commit to Continuous Improvement

     Having an audit creates a growth mindset in which you're committed to continuous improvement.

It's one place where you can compare a snapshot of the financial landscape at the same period of time, year after year. This gives you an opportunity to celebrate your growth, the challenges that you've overcome, and your commitment to your overall financial health and success. 

When Should You Have an Audit?

     By now, you may be wondering, “When should we have an audit?” Or you may be asking, “Should we be having an audit?” Well, as a minister that stewards resources that ultimately belong to God and to the people that have entrusted them with you, I think it's important that we maintain the highest standard that we possibly can. The best guidance that I've received has come from the Evangelical Council for Financial Accountability (ECFA). The ECFA says that with all these factors considered, it still may not be best to jump into an audit at the very beginning. However, it's important to note that CPA firms can offer a variety of services to meet you where you're at. My pro tip would be to  start with a lesser service and work up to a full audit.

 Here's some numerical recommendations I’ve found from the ECFA:

Nonprofits Under $2,000,000 in Annual Revenue

 If your annual revenue is less than $2,000,000, you might want to start with a compilation. That's a very low in scope attestation service that a CPA firm can provide. 

Nonprofits With $2,000,000 - $3,000,000 Annual Revenue

     As you grow past the $2 million mark, start looking for a Financial Statement Review, which is also smaller in scope than an audit. But this review begins to really prepare you for the eventual reality of a full audit. 

Nonprofits Over $3,000,000 in Annual Revenue

     Once you reach the $3 million level you should start thinking about whether or not you should have an audit done. 

Reasons Your Nonprofit May Need An Audit Sooner

•  Do you receive federal grants in excess of 500,000?
•  Do you have governance documents that require you to have an audit? 
•  Is there an audit requirement within a donor gift or an endowment that's been established?

For more on the audit process, check out this post: What Does Your Board Think About Your Audit?