It’s hard for nonprofit executives to put a price on an audit, for good reason. They are difficult to conduct due to several factors, including the auditor’s time to complete the task, the amount of risk an auditor must assume, and the potential hazards they can uncover.
Why conduct an audit?
There are several reasons why you might consider an audit, such as it may be required by law, or it demonstrates the organization’s dedication to financial transparency. Also, in some cases, donors and foundations require them. Finally, watchdog groups may take an audit into consideration when “ranking” a nonprofit.
The FASB Impact
In addition to audits being complex, there are new FASB Accounting Standards affecting nonprofit fiscal years after December 2017. Those Standards focus on three areas that also impact the amount of time, resources, and risk an auditor takes, including:
- Restricted and unrestricted net assets;
- Liquidity disclosures; and
- Functional expenses.
Restricted and Unrestricted Net Assets
The revised Standards have updated “restricted contributions” to include without donor restriction and with donor restriction. Those directives help donors to decide if they want a donation for a purpose or a time period for use. The nonprofit, on the other hand, is required to report those finances clearly as either with or without restrictions. Prior to the new standards, there were three categories—unrestricted, temporarily restricted, and permanently restricted.
To satisfy the new Standard, nonprofits need to disclose the resources they have on hand now and what could be used to cover expenses within the next year. It must also disclose how the resources will be used and the state of future resources and might include cash and certificates of deposit that will be paid out within the next year, such as a grant, line of credit, or client fee payments.
What might also be new for an organization that may have never had an audit is that expenses must be separated into three functional areas, including program management, program services, and general. However, there’s an additional step. They must also include the “nature” of the expense, which means identifying the specific line item where money was spent within those categories, for example, line items like salaries, occupancy expenses, mortgage interest, or rent.
Are there audit alternatives?
Yes, there are two alternatives to an audit, including a financial statement review and a financial compilation. However, those alternatives do not take a deep-dive into the investigation nor analysis; nor do they meet any of the legal requirements of an independent audit.
What can executives do to help minimize costs?
According to the National Council of Nonprofits, “Depending on the geographic region where the nonprofit is located and how large the organization is, audit fees can exceed $20,000 for large nonprofits located in major urban areas. It is not unusual for an independent audit to cost $10,000, even for a small nonprofit.”
Here are several things you can do to help minimize the costs:
- Keep well-documented and organized books and records;
- Use an electronic bookkeeping system;
- Document entry details;
- Hire a part-time, experienced bookkeeper; and
- Consider a remote audit, which means the auditor conducts the audit without a site visit.
If your nonprofit is considering or is required to have an audit, reach out to me. Let’s discuss why you need the audit; if an audit is the best option; and the steps you can take to help maximize the outcome.