Soon after year-end and closing the books, it’s a good time to start thinking about preparing for your annual audit. Or is it? Not all charitable nonprofit organizations are required to conduct an independent audit. However, there are some valuable benefits that can result from conducting an audit anyway. The following are circumstances that may trigger the requirement for an independent audit:
- Federal, state, and local governments may request a copy of your organization’s audited financial statements.
- If your organization expends $500,000 or more in federal funds in a year, you may be subject to special audit requirements called A-133 requirements. (Currently, the limit is $500,000, but will be raised to $750,000 in 2015.)
- Some contracts with state and local governments to provide services in the community may require the not-for-profit to conduct an independent audit.
- Currently, 25 states at varying revenue limits require that charitable organizations submit a copy of their audited financial statements when they register with the state for charitable solicitation/fundraising purposes. If your organization is soliciting funds or fundraising in any states with an audit requirement, audited financial statements must be submitted regardless of where your organization is located.
- Private foundations may request that a not-for-profit submit a copy of the organization’s most recent audited financial statements in conjunction with submitting a grant proposal.
- Some banks may require a not-for-profit to have an audit as a condition of receiving a loan.
Even if your organization doesn’t fall under any of the above parameters and is not required to conduct an independent audit, an annual audit of an organization’s financial statements can provide some benefit to your organization:
- Generate confidence in donors: An unmodified audit is generally a universal indicator (although not a guarantee) that an organization is investing in its financial management and that the financial statements are likely to be accurate. It also reflects that the organization is committed to fiscal responsibility and accountability.
- Ensure compliance with accounting standards: Board and staff leadership benefit from an audit conducted by a CPA firm with current knowledge of not-for-profit accounting standards. As a result, this can help the organization realize best financial management practices. The not-for-profit staff sustains a sense of accounting discipline and responsibility throughout the year knowing they will have to defend accounting judgments to the auditor at year-end.
- Design better internal control structure: An important part of the audit is for the auditor to understand the internal control of the organization. If deficient, the auditor will communicate any deficiencies to management and corrective measures can be taken to strengthen the internal control environment of the organization.
- Deter fraud: Even though the annual audit process may not prevent or detect fraudulent activity, the prospect of an audit may serve as a deterrent function.
Article written by Tanvi Sinha, Audit Supervisor. Originally contributed to Access National Bank’s Nonprofit Advisor Spring 2014 edition