Special to the Philanthropy Journal
By Julleen Snyder
The Importance of Audits for Nonprofits
Although audits can be a nerve-wracking, tedious process, conducting an audit for your nonprofit is an important way to build your reputation for integrity and provide transparency to your board members, donors, and the public. The audit process is also a time to get advice on your financial practices and determine what can be improved. The auditors will issue a report on your organization to your board of directors that speaks to whether or not your organization fairly represents your current financial position without material inaccuracies or misrepresentation.
Understanding how to prepare for a nonprofit audit and what to expect during and after the process can help reduce the stress and anxiety you might be feeling in the days leading up to the procedure. Here’s what to know.
How to Prep Your Nonprofit for an Upcoming Audit
Adhere to Year-Round Protocols
Above all, ensure that your organization follows certain protocols, values, financial accountability, and precautions year-round so that everyone can feel more at ease during the time of the audit.
Create an Audit Committee
If possible, set up an audit committee. Separate from your board of directors, an audit committee will be a designated group that establishes controls and communicates directly with the auditors on-site before and after the process to ensure everything goes as smoothly as possible.
Hire the Right Auditor
Since not-for-profit organizations have many different and sometimes complex needs during an audit process, choosing the right external auditor is an essential step in preparing for an audit. The right auditor will be able to assist you before, during, and after the process.
Complete a detailed Request for Proposal (RFP) to find the best auditor for your nonprofit, and thoroughly review any applicants to ensure they have experience in nonprofit audits and are committed to quality.
Arrange a Pre-Audit Meeting and Gather Materials
Once your auditor is chosen, have your audit committee meet with them for a pre-audit conference to confirm the upcoming schedule, pertinent dates, and materials needed. Your accounting team should have up-to-date, accurate, and organized records, perhaps all in an accessible e-folder specifically for this year’s audit.
Communicate With Kindness
Communicate with the rest of your team to keep everyone in the loop about what to expect during the process, and be ready to share any results or issues that happen to pop up. Kindness and communication are key during this process, both to the employees of your nonprofit as well as to the auditors themselves.
What Happens During a Nonprofit Audit
During a nonprofit audit, expect members of your team (especially management) and your board of directors to be interviewed. Usually auditors will review board minutes and any pertinent financial documents.
A nonprofit auditor’s goal is to gain an understanding of your internal financial control structure and obtain confirmations of any investments, revenue, receivables, account balances, and transactions. Once the audit is finished, the report will state that it was performed within the required standards and qualifications and express an “opinion,” which will be your nonprofit audit result.
Possible Audit Results
An unmodified opinion is the optimal audit result. This means that the auditor concluded that your financial statements fairly represents your nonprofit’s operations and financial position.
A modified opinion suggests that the information gathered was limited in scope, or that the generally accepted accounting principles (GAAP) were not met to their fullest potential. Although not ideal, this opinion is still generally accepted by investors, lenders, and creditors.
An adverse opinion is when the auditor comes to the conclusion that the nonprofit’s financial statements are misrepresented and misstated and do not accurately portray your organization’s financial performance and health. Receiving this result is detrimental to an organization since it raises a red flag surrounding its ability to adhere to GAAP.
Disclaimer of Opinion
Lastly, a disclaimer of opinion means that the auditor does not have enough information to come to an accurate post-audit result. The auditor may not have been able to complete all audit procedures, and therefore cannot give an opinion one way or the other on the organization’s financial performance.
After Your Nonprofit Audit
Once you’ve received your nonprofit audit results, sharing them with the rest of your team, your donors, the board, and even with the general public is in your best interest. Full transparency creates a reputation for integrity, honesty, and trust. This will instill confidence in your donors and lenders. You can share these results on your website, social media, or in a regular newsletter, but be sure to let your auditor know where you intend to publish their opinion.
After reviewing the results with your board and management, discuss what needs improvement and implement a plan of action to fix any issues.
A successful audit can give your nonprofit a new feeling of confidence and financial stability moving forward. The process can also be a time to strengthen communication, forge new bonds among your team, and discover new ways to organize and construct your business.
Julleen J. Snyder (CPA, CGMA), Partner, has been with Jacobson Jarvis since February, 1995. She has both practical experience within a not-for-profit organization, as well as a solid background in accounting and nonprofit auditing. This multi-disciplinary experience provides her with a unique perspective of the clients’ issues combined with the ability to implement timely, appropriate solutions.