Edward M. Rose and Mark Danes
Your nonprofit has never, or not recently, had a comprehensive audit performed by a certified public accountant, or CPA, and there are no current external requirements that mandate an audit, such as debt agreements or grant provisions.
Your board of directors has expressed its concern, however, that there is no independent testing of the accounting records.
The board would like to have an audit, but agrees with management that the cost is prohibitive.
An “Agreed-Upon-Procedures” engagement, performed by a CPA, could be the appropriate compromise.
Depending on the complexity, the cost of such an engagement could be as low as 25 percent to 30 percent of the cost of a full audit.
What is it?
An agreed-upon-procedures engagement is the development of tailored tests and procedures agreed to by a CPA, a nonprofit and possibly another interested third party, such as a granting agency.
The procedures are documented in an “engagement letter” that lists the tests to be performed, including the number of financial items to be tested, as well as the identification of any third parties that will receive the final report.
All parties involved should meet and discuss the areas where procedures are desired, and how much testing should be performed.
Every account in the year-end “statement of financial position” and “statement of activities” should be considered for testing. Grant-compliance requirements also should be considered.
The report of the CPA will reflect not only the outcome of those agreed-upon procedures, but also can identify areas for potential improvement in a nonprofit’s operational or administrative efficiency.
Following is a template for how an agreed-upon-procedures report would look:
“We have performed the procedures listed below, which were agreed to by XYZ Nonprofit and ABC Foundation, solely to assist you with respect to the accounting records and controls of the Nonprofit as of and for the year ended 12/31/11.
“The Nonprofit’s management is responsible for its accounting records.
“This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants.
“The sufficiency of these procedures is solely the responsibility of the Nonprofit and the Foundation.
“Consequently, we make no representation regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose.
“Our procedures and findings are as follows:
- We confirmed cash and debt balances as of 12/31/11 with the Nonprofit’s bank.
- We compared confirmations above to the statement of financial position and bank reconciliations provided by management for reasonableness and consistency. No exceptions were noted, but we did want to point out that…
- We chose 60 cash disbursements during the year and vouched to supporting documentation to ensure compliance with the Nonprofit’s policies and procedures. The following exceptions were noted: …
“We were not engaged to, and did not conduct an audit or examination, the objective of which would be the expression of an opinion on the accounting records. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.
“This report is intended solely for the information and use of the management and board of directors of the Nonprofit and the Foundation. It is not intended to be and should not be used by anyone other than these specified parties.”
Managing the cost
Of course, the more accounts evaluated, and the larger the number of items selected for testing, the higher the fee.
To lower costs, consider breaking down the proposed procedures into those that are required and those that would be helpful to have, and request a fee proposal for both.
If your nonprofit is flexible concerning when these procedures are to be performed, ask what time of the year is best for the firm and will result in the lowest fee.
Finally, have your nonprofit staff perform as many clerical procedures as possible.
For example, once the CPA makes the selection of items for testing, have your staff pull the supporting documents.
An agreed-upon-procedures agreement can be customized to the areas of highest concern for an organization while exempting the areas of less concern.
While it is not a comprehensive audit, it can provide comfort in a variety of areas for a fraction of the cost.
Edward M.Rose is a retired CPA and a consultant with the Executive Service Corps of the Triangle in North Carolina. Mark Danes, CPA, is a partner with the firm of Balentine & Borg and treasurer of Mallarme Chamber Players in Durham. He also contributes his time to the Accounting Assistance Program of the N.C. Center for Nonprofits.