Monday, March 8, 2010

Does My Non-profit Need an Audit?

Monday, March 8, 2010
I get a lot of phone calls from prospective clients inquiring if we do audits, and the cost to do an audit. After I advise them that we do provide audit and other attest services, I ask them a simple question – Why do you need an audit? Often times there's silence on the other end of the phone or the answer is “I’m not sure” or “My boss asked me to call” or “I’m a non-profit, aren’t I supposed to have an audit?”

While the question is simple the answer might not always be as simple. The fact is, there may be several reasons a non-profit organization should have an audit, and reasons you may not need an audit. The following are reasons your non-profit may need or require an audit:

Grantors/Donors – As more non-profit organizations increase their fundraising efforts they often seek grants from various foundations and public/private sector agencies. These agencies may require that audited financial statements be provided or accompany the grant application. These agencies want to make sure that their money is going to legitimate, financially stable organizations that have reasonable controls in place to ensure the money will be spent for the purpose requested. These grantors may also request a copy of a management/deficiency letter that may be the by-product of the audit and addresses control or operational deficiencies and related recommendations to address these deficiencies. These grantors may require audited financial statements throughout the grant period as well for the same reasons, to monitor the use of the proceeds and the financial health of the non-profit grantee.

Federal, state and local government agencies – Some non-profit organizations receive grants or other awards from government agencies, and the related agreement may require that the recipient organization have an organization-wide audit that includes some level of testing of compliance and internal controls. The infamous “Single Audit” or audit in accordance with OMB Circular A-133 may be a requirement of the grant agreement, and is generally required for organizations that have total expenditures of federal awards in excess of $500,000 during the organization’s fiscal year. These federal awards may be direct awards from the federal government or pass-through awards to state or local government agencies that are ultimately passed through to the non-profit organization.

State law - Pennsylvania, for instance, requires organizations soliciting funds for a charitable purpose to register with the Department of State's Bureau of Charitable Organizations, file an annual registration statement, a copy of its IRS Form 990, and the appropriate financial statements. Organizations receiving $300,000 and over must file audited financial statements with the annual registration form.

Banks, vendors, landlords or other independent third parties - Loan agreements may have covenants or other provisions requiring the borrower to submit annual audited financial statements so they can get an accurate picture of the organization's financial status. Vendors, landlords, and other third parties may have the same requirements depending on the level of financial interaction and resources at stake.

Internal control - Management and/or those charged with governance (i.e. the Board of Directors) may believe that having an annual audit is a good internal control over financial reporting and safeguards assets of the organization. In general, an audit should not be relied upon as a primary internal control. This can be expensive, and while testing may be done for transactions that occurred throughout the year, the annual audit is performed once a year at the end of the organization's fiscal year. Management should ensure that good internal controls are in place throughout the year to safeguard the organization’s assets and promote good financial reporting.

In summary, while an audit may be perceived as a good annual check-up for the organization, management needs to consider the cost vs. benefit before making such an investment. In some cases, as noted above, the decision may be out of your control and a third party may be the one making the decision for you.

Still not sure? Contact us


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