There is so much talk about accountability, audits and audit committees today. It seems like every organization should be getting external audits on a regular basis. But should they? Need they?
In truth, even the regulatory bodies disagree – at least about the minimum donations and grants received that should trigger an audit. The Wise Giving Alliance, for instance, recommends $250,000 in donations, while the Panel on the Nonprofit Sector suggests $1 million.
About a third of the states have stepped into the gap to define this number for organizations that raise money from their residents, so nonprofits might want to begin by calling the department that handles nonprofit affairs in their state for guidance.
Of course, organizations that receive $500,000 or more in a single year in direct or pass-through federal funds must get an audit.
I think it’s valuable to offer a note of clarification here, as well. The trigger points are based on the level of contributions – or grants – an organization receives, not on its budget. For many organizations, the level of contributions will be less than the annual budget, though this may not be the case in an organization with strong planned or endowment giving.
Many organizations fall well below any of these trigger points. While it never hurts to get an audit to demonstrate to the public that organizations’ funds are being handled wisely, audits are very expensive today. In all likelihood, the cost would be prohibitive for many smaller organizations.
In speaking with a CPA that does a significant amount of nonprofit work, I was told that pursuing an audit, or even a review, for an organization with less than $100,000 in annual contributions would be both unnecessary and imprudent. It would be unnecessary because the number of transactions is probably relatively small and easy to verify, imprudent because an audit would – and a review could – end up costing a hefty portion of a nonprofit’s entire budget.
Instead, many smaller nonprofits might consider getting a compilation, a lower-level review performed by someone with accounting expertise, usually with a relationship to the organization.
While a compilation does not certify the process, it is much less expensive and ensures that an extra pair of eyes is looking at the numbers.
Of course, nonprofits should have standard procedures in place for handling all money. If there are any questions about these procedures or how they are being implemented, people need to push for answers that satisfy them.
If it is merely a case that someone on the board, or perhaps a donor, is pushing for an audit, nonprofits might see if that person is willing to underwrite the cost.
Terrie Temkin is founding partner at the Miami, Fla.-based management consulting group CoreStrategies for Nonprofits Inc. For five years, her “On Nonprofits” column appeared biweekly in The Miami Herald.