Smaller nonprofits often wonder when it’s necessary for them to seek an independent audit. With the cost of these being typically at least $5,000, for a small organization it’s often cost prohibitive.
The common wisdom from CPAs is an audit is not necessary if your nonprofit has less than a $100,000 annual operating budget.
While funding considerations aren’t the only reason to undergo an audit, it’s a significant one. Many funding organizations accept a compilation or review procedure by the CPA firm in lieu of the audit. But not all do so, and before your nonprofit decides whether to be audited it’s helpful to have identified where you plan to seek funding for the upcoming year.
A great resource for audit decision making and management is available to nonprofits at no cost from the National Council on Nonprofits, the online Audit Guide for Nonprofits.
If your nonprofit is considering its first audit, you’ll find this free tool useful.
If you simply want to check how well you’re doing with your audit process and preparation, this guide can be helpful.
The guide explains the differences between an audit, review and compilation and what your nonprofit should choose under what circumstances. A table with the legislated requirements of all states is included in the guide.
In Georgia, smaller nonprofits are not required to have a yearly independent audit. A charitable organization with contributions of more than $1 million in either of its two preceding years must file an audited financial statement prepared by an independent CPA.
A charitable organization with contributions less than $1 million and over $500,000 in either of its two preceding years must only have its financial statement reviewed by an independent CPA.
If your nonprofit has received funding from one or more federal government sources via a contract or grant (including from “pass –through” agencies) and spends $500,000 or more of that funding in a year it must conduct what’s known as a single audit.
This differs from an independent audit, all detailed in the Audit Guide.
If your nonprofit’s operating budget is more than $100,000 but less than described above and is planning to seek credit or a significant grant, it will be helpful to have an independent audit as documentation of fiscal strength and effective financial management.
The National Council on Nonprofits’ Audit Guide delves into the role of your board in preparing for an audit.
An audit committee may seem like a luxury for smaller nonprofits whose boards are already doing a lot of heavy lifting. But the committee can be ad hoc and its role limited. It would oversee the selection of an audit firm, ensure audit recommendations are implemented and be involved in any internal or external complaints about financial mismanagement.
Many nonprofits are unsure how to get ready for an audit, and the Audit Guide lays out the steps for managing the audit process. Additional help is often available from CPA firms engaged in audits via an audit packet to help you prepare and a pre-audit meeting for the same purpose.
It’s critical that your organization select a CPA with nonprofit experience.
An interesting aspect of the council’s guide is its discussion of whether an audit helps to uncover fraud in a nonprofit. The short answer is rarely, with details provided on ways your nonprofit can both ferret out and protect itself from fraud.
Links are available in the online audit guide to a number of additional resources for more in-depth information. This tool from The National Council of Nonprofits is an example of the council’s excellent work to keep its nonprofit members up to date on important sector news and best practices.
It also advocates for nonprofits across the country, a national voice for the nonprofit sector with the federal government and other policy makers, thought leaders, state nonprofit associations and more.
Their web site contains a wealth of resources you can explore for your nonprofit, whether it’s a small, medium or large organization.
Sarah Todd is the founder of Change Pioneers, an information resource on innovative change leaders working for social good. She can be reached at changepioneers@gmail.com and 912-224-2120.