When Should My Nonprofit Get An Audit?

Have you started talking about an audit? Yes. I know its a funny word that can mean many different things. Well, let me share with you my best tips on when you should get an audit done for your nonprofit? Let's dive right in!

What exactly is an independent audit 

What exactly does the word audit mean? Generally speaking, the word audit means to inspect or to examine or verify, but in the terms of a nonprofit and financial realm, that term is actually used to refer to the technical work performed by an independent CPA.

For the sole purpose of issuing an opinion, or one page summary in front of your financial report on the accuracy and reliability of the financial statements, based on generally accepted accounting principles also referred to as GAAP.

3 benefits of having an audit 

• Increased trust in accountability: donors gain confidence, knowing you've got an independent CPA looking at your finances. Grant sources and other funding sources appreciate the trust and accountability that comes from an independent audit
• High Standard financial Practices: Having an audit, is truly the highest standard of financial practices for a nonprofit to have done each year.
• Added Value: There is so much value added when an independent professional is seeing your finances and your financial processes.

The downside of an audit   

• Higher level of staff skill: It just simply takes a higher level of staff skill for the organization to be able to accomplish a financial statement audit. So if you're small nonprofit, and you just have a bookkeeper who knows how to process basic transactions, it may require an investment in either a contractor or consultant, or even audit firm who might charger higher fees
• The Cost: This is a big one, as inflation is higher than ever, and things continue to go up in prices across all industries. Finding a standard financial statement audit for less than $10,000 is nearly impossible. Depending on your location and size of your nonprofit those fees could be even higher.

When are audits required? 

There may be times when an audit is required. Here are a few examples of when that may happen.

• Carrying a bank loan: Banks may require financial statement audits.
• Requirements from bylaws: Check you bylaws to see if there is a requirement by your governing board to have an audit.
• Federal Government: If you receive over $750,000 in federal funds, you could be required to have an audit, and an additional audit called a single audit, which tests compliance over funds for major programs.
• Granting Agency: Such as a foundation or other funding source. If you're accredited, sometimes your accrediting agency will require you to have an audit
• State Governments: state governments often require audits for nonprofits receiving over $500,000.

When should you have an audit?  

If you are not required to have an audit for one of these reasons, here are a few tips to help you determine when you should consider voluntarily doing an audit.   

The best guidance I can give comes from the Evangelical Council for Financial Accountability (ECFA).  The ECFA says that, with all things considered, it may not be best to jump into an audit at first.  

However, CPA firms do have a variety of services that they can offer to meet the needs of where you're at.

Pro Tip: Start with the lesser service and work up to a full audit!

Additionally, ECFA provides some really great guidance that says that if you are currently under $2 million in revenues, you could consider a compilation, which is less in scope than an audit but still performed by an independent CPA. When you reach the point that you cross the $2 million threshold, they recommend a review.  And at the $3 million point, the ECFA  recommends you have an audit done.

These are my tips on considering when you should have an audit done for your nonprofit. I hope you find this article helpful, and it serves as helpful guidance to you!