28 Feb Financial Statement Audits: What Your Nonprofit Needs to Know
Audits: just saying the word is enough to give even the most experienced executive director a rush of anxiety. They can be stressful, time-consuming and, if you run a nonprofit, often necessary.
A financial statement audit is an examination of an organization’s financial records, accounts, and accounting practices. This is different from an audit where the IRS comes knocking on your door. An audit is performed by a third-party CPA firm whose goal is to give you a clean or unmodified opinion (the type of opinion you would hope for). Good auditors will also advise you on the state of your financial data and, if necessary, help you adjust your financial data in the process. This may include helping to update financial data and internal processes in order to comply with accounting updates and best practices.
As intimidating as they might seem, audits are actually meant to help your organization. You don’t need to be afraid of them: you just need to be prepared. In this article, we’ll give you a quick and simple breakdown of some items your nonprofit needs to know about participating in an audit.
How to determine if you need a financial statement audit
Not all nonprofit organizations are required to have annual financial statement audits; however, there are several circumstances that might trigger the need for an audit to be performed.
Here are three considerations to keep in mind when deciding if your nonprofit needs a financial statement audit:
1. By-laws & Other Agreements: Review your by-laws, grant agreements, contracts, and other agreements held by your organization. These may state whether an audit is required for continuing funding, and how frequently an audit is required. In addition, many states have specific requirements regarding audits for nonprofits. The council of nonprofits has compiled a list of each state’s audit requirements that can be found here.
2. Organization size: Audits aren’t cheap, which can make doing one annually a challenge financially for smaller organizations. If the budget doesn’t allow for having a full financial statement audit done every year, look into having a full audit done every 2-3 years and having a financial review on the years in between audits. A review does not include an auditor’s official opinion, yet still gives limited assurance to the accuracy of the financial statements at a much more affordable price.
3. Your board: What is the general feeling of the board regarding an audit? Audits provide financial oversight and accountability, so some board members may feel strongly and more comfortable knowing the organization has done its due diligence on a more regular basis. Provide board members with these details and find out if they have a preference.
As you can see, audit requirements for nonprofits can vary. Ultimately, the best practice is to re-evaluate the above considerations at least annually to determine if there are any circumstances that indicate an audit should be done.
3 easy ways to prepare for your financial statement audit
It’s not uncommon to feel overwhelmed by the prospect of an audit. An audit can be an extensive process and much of the work required will likely fall outside of your staff’s areas of expertise. Here are three simple things your organization can do to ensure you’re not scrambling when the auditors show up at your door:
1. Complete an internal review of your financial statements ensuring that balances appear reasonable and there are no glaring inaccuracies.
2. Review and reconcile general ledger account detail.
3. Proactively collect any documents that will support account balances, such as bank statements, asset listings, and roll-forward schedules. Compile the board meeting minutes for the year and have them ready for review by your auditor.
While these steps aren’t required, doing them in advance will help ensure you go into the audit feeling comfortable and prepared. What’s more, doing a bit of legwork upfront will also help the audit process go smoothly, and that’s good news for everyone involved.
Collaboration: your auditor is your partner
Having your organization’s finances under a microscope and answering the many probing questions that could come up during the audit process can leave you feeling anxious. It’s easy to dread the audit process and to think that auditors are out to get you.
But the truth is, the definition of auditor is two-fold: first, a person authorized to examine and verify accounts and secondly, one who hears or listens. The latter is what can often be misunderstood by nonprofit organizations. Auditors should be viewed as trusted advisors who help to assist organizations with ensuring financial compliance and best-practices for operating.
If navigating the auditor relationship makes you nervous, Trestle can help. Ultimately, whether you choose to work with your auditor on your own or through a back-house service provider like Trestle, just remember: your auditor is your partner. They want you to be successful!
Benefits and outcomes of the financial statement audit
After engaging your auditor, the process can take anywhere from 2-16 weeks, with the average time to completion taking about 4 weeks. The steps will typically go as follows:
1. Engage your auditor
2. Collect and prepare necessary documents (2 weeks)
3. Audit process, Q + A (2-12 weeks)
Once the audit is complete, your auditor will provide you with an audit report for your organization. This document will attest to the accuracy of your organization’s financial statements and will highlight areas for improvement, if any, that were identified during the audit.
For many nonprofits, an audit is the key to creating trust and transparency in the organization with stakeholders both internally and externally. Management can be confident knowing that the financial data is accurate and outside grantors and donors can know that they are supporting an organization that is being regularly reviewed for financial credibility.
Trust Trestle along the way
Do you want to have your nonprofit organization audited without having to worry about the heavy lifting? With over 52 years of combined experience, our team knows how to translate your organization’s operational accounting to auditors, which means you’ll spend fewer hours on audits (up to 80 hours less).
Trestle is here to take care of everything from finding the right auditor to working directly with the auditor so you and your staff can focus on what matters most: making a difference.
Schedule a call today and learn how Trestle can help.