How To Have a Smooth Financial Audit for Your Nonprofit
Nonprofits rely extensively on donations and grants to fund their stated work. In return for their charitable activities and services, they generally enjoy significant tax benefits. To help keep all the money and fundraising above board, most nonprofits undergo an annual financial audit.
No matter the size of your organization, the experts at Fisher Bookkeeping can help you prepare for your financial audit. Our firm has offices in Portland, OR, and outside Lexington, KY, to serve clients around the country. We work hard to support you as you do the hard work of serving the community. Reach out today to see how our staff can help.
Does Your Nonprofit Need a Financial Audit?
The quick answer to this question is yes. Every nonprofit should invest resources in an annual financial audit for several reasons:
- Your state may legally require an audit. Each state sets its statutes regarding the financial reporting for nonprofits that operate in their jurisdiction.
- Your nonprofit may fall under federal reporting requirements. Charitable organizations that receive a certain level of funding from federal agencies may have to undergo audits each year.
- A financial audit demonstrates transparency. Donors want to know what organizations do with their dollars, and an annual audit keeps this information available. Ratings from groups such as Charity Navigator use financial health and transparency to rate nonprofits. These ratings can help donors decide where to give their money.
- Gain access to grants and other funding sources. Many foundations will not even consider a grant application unless the nonprofit has a financial audit. By undergoing an independent assessment each year, your organization has a better chance of winning grant awards.
- Audits help you avoid and identify fraud. Nonprofits typically run on very tight margins. Every penny counts, and embezzlement or fraud can sink an organization quickly. By submitting to an audit, you can help your nonprofit avoid this disaster.
What Happens During an Audit?
A financial audit requires an independent expert to comb through your nonprofit’s books. Your group’s in-house accountant, if you have one, does not do the audit. However, the auditor will work closely with your internal team and ask how things are run. Part of their job is to examine what different people know about your organization’s procedures.
This expert will dig deep and then issue a report on their findings. They are working to determine whether or not the nonprofit is accurately representing their financials.
The auditor will examine the organization’s:
- Accounts
- Financial Records
- Accounting Practices
- Internal Controls
As the CPA works through their audit, they assess the nonprofit’s adherence to generally accepted accounting principles (GAAP). These best practices aren’t legal statutes, but they are vital to a successful audit and well-run books. This is true in for-profit and nonprofit operations.
How to Prepare for Your Nonprofit’s Financial Audit
A significant amount of preparation can happen before an audit begins. The more you prep ahead of time, the smoother your audit will go. Here are some tips to help you have a smooth audit experience.
1. Choose the auditor or auditing firm wisely.
Your nonprofit’s board of directors should determine who is responsible for choosing an auditor. For smaller organizations, it may be the whole board. For larger groups, there may be an audit subcommittee. In some nonprofits, this selection process falls to the finance committee.
Whoever it is, they need to do their due diligence to choose an auditor who has experience with charitable organizations in your state. Ask for references from other nonprofits and the auditor’s “Peer Review.”
The person or firm you are interviewing for the position should provide a proposal that clearly states the audit’s scope, timing, and cost. It’s wise to have legal representation look over a contract before you sign it.
2. Determine who on staff will be the point person.
Undergoing a financial audit can be disruptive to the flow of the workday. The auditor is likely to have questions or need additional information. Identify someone in your organization to be the liaison between the auditor and the board of directors.
Ideally, the go-between should have some understanding of the nonprofit’s financials. They should be able to answer most questions and gather documentation without needing to go to the board each time.
3. Gather and organize all pertinent information.
Obviously, the best way to prepare for a financial audit is to have all of your group’s financials up-to-date. By closing your books accurately each month throughout the year, you will have much of the data ready for the auditor.
Work with your bookkeeper to keep everything current as you get ready for the audit. They can also help you stay on top of any GAAP changes that you need to know about for your financials.
Before they begin working, ask the auditing firm how they want all of the necessary information. Do they want printouts or electronic files? Have everything in one spot for them to access. For electronic documents, create a folder with all the statements they request.
Your auditor should tell you what they will need ahead of time. Once they start auditing, though, it creates questions. It’s almost a guarantee that they will need more information after they get started. This is especially true if it’s the first time they have done an audit for your charitable organization. If you use them in future years, they will have fewer questions as they learn more about your operations.
4. Wait for the report.
After they finish their investigation, the auditor will issue a report to the board of directors. The report will be one of the following:
- Unqualified Opinion – This report is the stretch goal. An unqualified opinion means that the auditor found your financial representation fair and accurate, without exceptions. They didn’t find anything for your organization to improve upon in the audit.
- Qualified Opinion – A qualified opinion is the most common report to receive. In this situation, the auditor found a couple of areas in the nonprofit’s accounting where they do not follow GAAP. The investigation shows that although there are a few GAAP exceptions, the nonprofit is not misrepresenting its financials. The auditor often finds areas you can make more efficient.
- Adverse Opinion – The adverse opinion report is bad news. If an auditor issues this report, they found an overall lack of GAAP adherence. This report can also mean that the organization is misrepresenting its financial health.
- Disclaimer of Opinion – If an auditor comes back with this report, it means they couldn’t do enough of an investigation to submit an opinion. For example, this could happen if the nonprofit hindered the auditor’s access to pertinent information or didn’t have it available.
A Few Notes on Your Report
Ideally, an auditor will return an unqualified or qualified report. These two options speak well to donors, lenders, and grant administrators.
Either way, it’s important to remember a couple of things about your report.
- The auditor’s report is not a statement or judgment of the organization’s financial stability or viability.
- The report only examines the financials for the stated period. It doesn’t look at statements or accounting outside those dates. This fact is why it’s crucial to do a financial audit each year.
- The auditor works to help your charity do an even better job with its financial resources. Guide your staff and volunteers as they implement the auditor’s suggestions so that you get closer to GAAP each year.
You Don’t Have To Do It Alone
Fisher Bookkeeping has extensive experience in helping nonprofits keep their books in order and prep for audits. You don’t need to feel overwhelmed when you have our firm on your team. With offices outside Lexington, KY, and in Portland, OR, we can help organizations from coast to coast. Let’s connect and see how our friendly experts can serve you.
About the Author Barb Fisher
Barb is the CEO of Fisher Bookkeeping, an outsourced bookkeeping consultancy that provides small businesses with a full-service financial department. Her favorite aspect of work is to break down the accounting to meaningful bits, so entrepreneurs can make a powerful difference in their own business. She's also a power lifter (squat: 215, DL: 270).
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