Nonprofit audits are an essential part of financial accountability and transparency for your organization. They can also be a source of stress and confusion if you are not prepared for them. In this article, you will learn how to plan ahead, gather the necessary documents, communicate with your auditor, and follow up on the results.
An audit is an independent examination of your nonprofit's financial statements and records by a certified public accountant (CPA). The purpose of an audit is to verify that your nonprofit is complying with the applicable laws, regulations, and accounting standards, and that your financial reports are accurate and complete. An audit can also help you identify and address any weaknesses or risks in your financial management and internal controls. Depending on your nonprofit's size, funding sources, and legal requirements, you may need to undergo an audit annually or periodically.
Preparing for an audit should begin with effective financial and record keeping policies and procedures. Segregation of duties with required review and approvals will ensure that issues, hopefully, are addressed before the audit. A core board committee is the finance committee to assist with routine reviews of the financials. Finally, meeting with the auditor several weeks in advance to understand their processes and what files and backup to have ready for audit inspection is critical to an effective audit.
Many foundations request audited financial statements as a part of their proposal packages, so performing an annual independent audit can make your organization eligible for more grant funding. Sharing your audited financials on your website can also be a green flag for savvy donors to know that they can trust your organization to responsibly manage their donation.
Audits are culture-shaping events that illuminate an organization's strengths or expose its weaknesses. Proper preparation begins with a public commitment to complete transparency, a targeted plan for universal visibility, and an open and honest communication policy. If you intentionally apply the organizational values to the preparation process above, you will be well on your way.
Audit keeps someone on the straight and narrow. By complying to standard practices according to laws and regulations, decisions are made accordingly in considerations with the various stakeholders.
Choosing the right auditor for your nonprofit is a critical decision that can affect the quality and credibility of your audit. You should look for a CPA who has experience and expertise in nonprofit accounting and auditing, and who understands your mission, programs, and operations. You should also consider the auditor's reputation, fees, availability, and communication style. You can find potential auditors through referrals, online directories, or professional associations. Before you hire an auditor, you should check their credentials, references, and samples of their work.
In order to facilitate a successful audit, preparation and organization of documents is essential. These documents may include financial statements such as balance sheets, income statements, cash flow statements, and statement of functional expenses. Additionally, budget and variance reports, bank statements and reconciliations, general ledger and journal entries, grant agreements and reports, donor records and receipts, payroll records and tax forms, contracts and invoices, policies and procedures (accounting manual, internal control manual, conflict of interest policy, whistleblower policy, document retention policy), board minutes and resolutions, bylaws and articles of incorporation, IRS Form 990 and other tax filings should be organized. Furthermore, a list of key staff and board members with their contact information as well as their roles and responsibilities should be provided to the auditor.
Communication is essential for a successful audit, so you should establish a clear and open communication channel with your auditor from the beginning. Designate a point person to coordinate the audit process and serve as the main liaison between your nonprofit and your auditor. Regular communication is important to agree on the scope, timeline, and expectations of the audit, provide requested documents and information in a timely manner, clarify any questions or issues that arise during the audit, review the draft audit report and management letter, discuss the findings and recommendations of the audit, and implement any corrective actions or follow-up measures.
The audit process does not end when you receive the final audit report and management letter. It is important to share the audit results with your board, staff, funders, and stakeholders. You should also update your financial policies and procedures based on the audit recommendations, as well as improve your financial management and internal controls. Additionally, it is beneficial to monitor and evaluate your progress and compliance, and prepare for the next audit cycle. By following these steps, you can prepare for nonprofit audits with confidence and ease, while also using the audit as a means to improve your financial performance and accountability, as well as demonstrate your nonprofit's impact and value.
Here are the two best things I've found to make the audit process as smooth as possible: 1. Good record keeping year round. Make sure things get filed where they need to get filed daily. Many nonprofit accounting systems even allow you to attach your documentation to the transaction. This makes it easy to find (and the auditor can even get the document for themselves instead of asking you for it). 2. A strong intern. If you've filed things properly, then the accounting team can save dozens of hours by delegating audit project management to a competent intern. When the auditor asks for documentation, the intern can easily provide it to them (because its filed away properly).