6 Scenarios When Your Nonprofit Might Need an Audit
If you are stumbling across this article, you probably have already done some initial research into the basics of nonprofit audits. Now, it is time to take a closer look at the different scenarios that may trigger the need for one.
Our multi-article nonprofit audit guide continues with this examination of six audit-worthy scenarios. After you get these down, you may want to look into how to request a nonprofit audit, who audits a nonprofit, and how much does a nonprofit audit cost so that you are ready should an audit come your way!
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Why Are Nonprofits Audited?
There are a few reasons your nonprofit organization may undergo an audit. You can divide these reasons into two categories: internal and external.
External Audit Reasons
External means that an individual or entity outside of your organization requests an audit.
Federal or state agencies may require a compliance check if you are applying for government funding or if they want to verify that you are operating within your stated mission.
Private foundations also offer grant funding, so they may request an audit as a part of the application process.
Charity watchdog groups may request a compliance check to evaluate whether or not your organization is adhering to nonprofit best practices.
Members of the general public can request an IRS audit if they suspect wrongdoing.
Anthony never realized how many reasons there are for nonprofit audits!
Internal Audit Reasons
While some may wonder why a nonprofit would go through the trouble of auditing itself, there are actually several benefits of conducting internal audits, including:
You model transparency by demonstrating that you are not afraid to show what your financial documentation looks like.
You maintain accountability by ensuring that your financial house is in order.
You are prepared for an external audit for one of the reasons in the previous section.
You show that you are open to improving your financial practices.
Pro Tip: At this point, you may be wondering who audits nonprofit organizations; the answer is: there are any number of government agencies, private foundations, individuals, and businesses that can do so, depending on the circumstances.
6 Scenarios That Could Trigger a Nonprofit Audit
Now that you have a general idea of why audits happen, let’s take a closer look at six of the most common circumstances that trigger them.
A federal, state, or local government body can request a partial or full audit of your organization. A large portion of state governments require nonprofits to provide copies of their audited financial statements when they register for fundraising or reach a certain revenue threshold.
A specific example of the above scenario relates to high spending. The federal government has special audit requirements in place for high-revenue nonprofits that receive government grants. If your organization spends more than $750,000 in federal funding per year, the federal government requires you to submit what is known as a "single audit."
The Single Audit Act of 1984, as amended in 1996, allows the federal government to monitor organizations that use a significant amount of federal money to assist with their operations. The scope of a single audit is larger than that of a typical independent audit, covering the entire financial operations of a nonprofit. The federal government implements rigorous levels of testing to ensure that:
There are substantial internal controls in place.
The financial statements are both accurate and in line with federal cost principles
The nonprofit complies with any specific laws or regulations that apply to that particular funding stream.
When your organization has a contract with the state or local government to provide services to the community, you may be subject to a compliance check in the form of an audit. As with the use of any government money, this ensures accountability.
Private foundations may also demand accountability in terms of how you are using their funds. In other words, they want you to demonstrate that you are spending them on your mission. Some foundations request an audit as a condition for grant approval. They typically do not call for a new audit; they just want a copy of your most recent one.
Some banks require you to submit the results of your most recent audit in order to receive a loan. They use your audit to verify aspects of your loan application. Specifically, they use it to determine your credit-worthiness by ensuring that you have enough declared assets to cover your loan amount.
Moreover, if you want to apply for a nonprofit banking account, a bank may ask for your latest audit to verify your nonprofit status.
Peace of Mind
Finally, you may choose to conduct an independent audit for peace of mind. In fact, it is standard practice to run yearly audits to ensure that your financial statements accurately reflect the well-being of your nonprofit and that your operations, policies, and procedures are in compliance with generally accepted accounting principles (GAAP).
Nonprofit Audit Alternatives
A note on nonprofit audit cost: some smaller nonprofits may not be able to afford a yearly independent audit. Certified public accountants (CPAs) are not cheap, and even a small nonprofit may end up paying $10,000 for an audit. If an annual independent audit is not in your budget, there are some cheaper alternatives.
Salma just realized that her nonprofit may need an audit!
A review is essentially a mini audit. An independent firm still examines your financial documents, but not with the same rigor and scope as for a full-blown audit. A review costs about half as much as an audit, but the attending CPA does not offer an opinion as to whether or not your transactions and other financial statements are in alignment with GAAP. The auditor simply states whether you need to make any modifications. Funders sometimes accept a review in lieu of an audit, but this is not a guarantee.
A compilation is even less expensive. It is when your accountant assembles your financial statements. No one audits or reviews your financial documents, and, therefore, you do not get an opinion as to whether or not your nonprofit is in compliance with GAAP. A compilation can help you keep your finances organized, but it does not do much more than that. Unlike a review, it is not accepted in place of an audit in any situation.
Pro Tip: If an annual independent is out of reach given your budget, conduct an audit as often as you can afford — perhaps every two to five years — with a review each year in between.
While audits are not always required, especially for smaller organizations, the best way to be prepared for any eventuality is to conduct an independent one annually. Not only does it help keep your organization’s financial house in order, but it also prevents stress and panic if you ever need to conduct an external audit.
As a tax-exempt organization, government agencies, private foundations, and donors, hold you to a high standard of accountability, accuracy, and assurance. With regular audits, you can demonstrate to your stakeholders and all others that you are worthy of their trust.
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💡Do nonprofits need to provide audited financial statements?
If you are applying for a grant or loan, the approving entity may ask you to provide your most recent audited statements in lieu of conducting a new audit. However, this is not always the case, so ask the entity to be sure. Find out more.
🔑 Which nonprofits must undergo an audit?
Any nonprofit that handles a large amount of money likely has to submit to an audit. Even some mid-sized and small organizations may come across situations that require audits, such as applying for grants. Find out more.
📝 What does a nonprofit audit look for?
A nonprofit audit looks at an organization’s financial documents to ensure that they are both fair and accurate. They also examine operational and accounting practices to determine whether they align with GAAP. Find out more.