Maintaining control

Annual audit a good idea for small nonprofits.

By Charlie Coe

[06.30.04] — Nonprofit organizations face the challenge of establishing and maintaining sound accounting controls.

An annual audit, while not ensuring against illegalities, is a recommended safeguard.

Some states require an annual audit if revenues exceed a specified amount, while other states have no audit requirement, relying exclusively on the annual state tax return.

And some funding agencies, such as foundations and United Way affiliates, require an audit as a condition of receiving funds.

The absence of an audit poses potential risk of misuse of funds.

A study in North Carolina, for instance, found that the absence of annual audit resulted in 15 of the 16 fraud and embezzlement convictions during a two-year period of nonprofit volunteers serving in staff roles

Nonetheless, audits may be too expensive for small nonprofits.

There are less costly alternatives:

* A review, about half the cost of an audit, is conducted according to Statements on Standards for Accounting and Review Services (SSARS) and signed by a certified public accountant. The auditor, though, offers no opinion, but rather gives a negative assurance: “I am not aware of anything that would materially alter these statements.”

* A compilation, performed in accordance with SSARS, costs less than a review but does not offer even a negative assurance, though financial statements are provided.

* Agreed upon procedures, performed in accordance with SSARS, specify that an auditor examine internal control procedures or compliance with grant provisions.

Which option is preferable?

Three auditors, who do extensive nonprofit auditing in North Carolina, reported that organizations typically opt for agreed-upon procedures, judging that that the cost savings of an audit review do not offset the absence of an auditor’s opinion, nor does a compilation assure the adequacy of accounting controls.

Absent funding for the three audit alternatives, an organization may designate a qualified board member to conduct an audit review with advice from an auditor, or may ask a local government’s accounting staff to review accounting controls if local funds are received by the nonprofit.

Separating accounting duties is especially problematic for organizations with only two staff members.  Such procedures should be delineated for all accounting functions.

Charlie Coe is professor of public administration at N.C. State University in Raleigh.

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