Throughout my career one of the most frequent questions, I have been asked is, “Does our nonprofit organization need to have an audit? ” Like so many things when it comes accounting services for nonprofit organizations to financial matters for an organization, it depends. Before we explore when an organization could be required to conduct an audit, let’s define what an audit is. Audits can also be helpful in identifying areas where your organization can improve its financial practices. Increasing donor trust in the financial health of your nonprofit can be achieved by making audited financials available upon request or on your website along with your Form 990 returns.
Download our guide book to help you prepare for a nonprofit audit.
- This ensures that the funds are being used appropriately and according to the grant’s terms.
- Implementing best practices in auditing small nonprofit organizations is essential for maintaining financial health, compliance, and operational efficiency.
- Not-for-profit organizations receiving less than $1,000,000 in annual gross revenue would no longer be required to undergo a financial statement audit.
- Comparatively, in performing an audit, the auditor must corroborate the ending balances in the client’s accounts and disclosures.
Many such professionals will be listed in directories maintained by entities like the American Institute of Certified Public Accountants (AICPA) or the National Council of Nonprofits. They will have the appropriate qualifications, such as the Certified Nonprofit Accounting Professional (CNAP) or Certified Public Accountant (CPA) with nonprofit specialization. By showing your commitment to fiscal and legal responsibility, an audit strengthens donor confidence, helping you retain contributors and therefore increasing the chance that they will step up donations. Picture the IRS checking if you correctly report income from a major fundraising event, like an annual gala or charity auction. It assesses your tax-exempt status, unrelated business income, and proper handling of donations and expenses.
Advice for choosing an auditor
- This is particularly important if your organization has the technological means to run paperless nonprofit audits.
- The IRS may conduct either a field audit (on-site review) or a correspondence audit (conducted remotely), depending on the complexity of the issues under review.
- The audit committee may also serve as the “ombudsperson” for the nonprofit, and if so, would be specifically charged with the responsibility to address complaints about financial mismanagement.
- However, the other types are also useful tools for maintaining transparency and accountability.
This will involve creating controls or procedures to ensure that corrective action is taken should any issues arise during future audits. In addition, proper documentation should be maintained in case further evidence is needed by auditors at a later date. The ONCA changes how nonprofits need to report their finances to their members. Any member may request a copy of the financial statements, but you do not have to provide copies to everyone at your annual meeting.
The 4 Benefits of Nonprofit Auditing
Then, use their insights to improve internal controls and enhance financial reporting. As a result, your organization will become more efficient and financially healthy, empowering you to invest more in your mission. If an audit is required by law, or if a third party has strict requirements that the nonprofit conduct an audit, a review or compilation will not satisfy that requirement. Nevertheless, nonprofits trying to manage costs should not be shy about asking whether the third party will accept a review in place of a full audit. The third party (usually a funder) may understand the goal of cost savings and accept a review instead.
Federal Law
Since you’ll have plenty of time to plan for most audits, you can take time to research and prepare. Once you’ve made these changes, you can send the audited information and modifications to the IRS to update your 990 forms. Nonprofit boards should create committees to focus on needs like governance, fundraising, and finance. Internally, it provides valuable oversight for your bookkeeper or accounting team.
- In the years when the nonprofit does not have an independent audit the nonprofit could elect to have its financial statements reviewed instead.
- The board of directors as a whole is responsible, unless it delegates this authority, such as to an audit committee.
- (For instance, in some states only board members may serve on standing committees of the board. In other states, standing committees may include non-board members.) Audit committees are typically made up of three to five members.
- This means that the auditor will examine the procedures and controls that the nonprofit has in place to prevent and detect errors and fraud.
- A financial compilation is the least time consuming and costly type of financial review.
Even better, with our nonprofit bookkeeping and accounting services, we’ll ensure your books are always audit-ready. Plus, give you timely financial reports and expert advice that help you carry out your mission. Despite the lower level of assurance, a financial review may be enough for some grantmakers to approve your organization. Even if a grant asks for audited financials, sometimes that isn’t a deal-breaker if you have a financial review and meet their other criteria. It offers limited assurance that no significant modifications need to be made.
