Understanding the Nonprofit Audit Process and Its Value


Figure holding a magnifying glass examining the word AUDIT, symbolizing thorough financial review and scrutiny of nonprofit organizations' finances.

Charitable nonprofit organizations generally aren’t required to conduct independent audits. Certain circumstance, however, could trigger an independent audit.

  • Federal, state or local governments may request a copy of the nonprofit’s audited financial statements.
  • If your nonprofit expends $750,000 or more in federal funds in one year, then it is subject to a single audit requirement to test for compliance with federal grants management standards.
  • If your nonprofit has contracts with state or local governments to provide community services, an independent audit may be required. You can contact your state attorney general or any auditor for your state’s requirements.
  • Lots of state laws want charitable nonprofits to show that they have audited financial statements to register with that state for solicitation and fundraising purposes. And this holds true whether or not you are located there. Checking out the Multi-State Filer Project to research and hopefully to simplify this annual registration process may be wise.
  • Private foundations can ask that a nonprofit show a copy of its most recent audited financial statements when submitting a grant proposal. You may want to consider contacting a program officer or grants manager at the foundation to ask if forwarding your IRS Form 990 will suffice. Still, they may require a yearly audit after they’ve funded you.
  • And, as you may have been expecting, some banks want to see an audit has been performed before they fork over any loan monies.

Many groups, such as the following, rate nonprofits and offer guidelines on when audits should be obtained:

  • The Better Business Bureau Wise Giving Alliance has a $500,000 annual revenue threshold for audits.
  • The Standards of Excellence Institute’s limit is $300,000.
  • The Independent Sector recommends a minimum of $1 million.

These groups are not regulating authorities, but they attempt to influence nonprofit practice and how the general public evaluates potential donation recipients.

There are inherent benefits that an audit provides:

  • Donor confidence. An unqualified audit opinion is a universally accepted indicator that an organization is investing in its financial management and that its financial statements are likely to be accurate. An audit symbolizes an organization’s commitment to fiscal accountability and, as such, it announces this to its own constituency, as well as the media and watchdog groups.
  • Financial best practices. By having an audit performed by a CPA who’s knowledgeable about current nonprofit accounting standards, the nonprofit’s board and staff leadership benefit by living with accounting discipline throughout the year, not just at year-end.
  • Protection against fraud. An annual audit can bolster the soundness of internal controls, although this isn’t a 100 percent deterrent to a staffer or volunteer who’s determined to steal. After all, an auditor is on-site for only a handful of days and may not detect the malfeasance.

If a full audit is cost prohibitive, engaging an outside CPA to conduct a financial statement review may work for your group. Such a review can offer limited assurance that your organization’s financial statements and accounting systems reflect an accurate picture.

To learn more about how our firm can serve your nonprofit organization, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.

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