06 May Financial Audits for Small Nonprofits By: Kellie Brungard, GPC

Audited financials are a common component of grant readiness discussions and are often requested by funders. However, new or small nonprofits may wonder if an audit is really necessary. Understanding why an audit is helpful to a funder, how to find an auditor, and what to do if an audit seems unattainable can help small nonprofits plan.

Why Do I Need an Audit?

An independent audit examines a nonprofit’s financial records, accounts, business transactions, accounting practices, and internal controls by an external auditor/CPA not connected to the organization. When an audit is completed, the nonprofit’s board of directors will receive an auditor’s report of findings. This report expresses professional opinions of the nonprofit’s financial performance and compliance with generally accepted accounting principles (GAAP); four types of reports can be issued:

1. Unqualified Opinion – A clean report means the auditor found no issues with the financial reports and the nonprofit fully complies with GAAP guidelines.
2. Qualified Opinion – This is issued when the financial reporting doesn’t comply with GAAP guidelines and shows the areas where the company can improve and the qualifications that must be met as a standard.
3. Adverse Opinion – The nonprofit must allow access to financial records without any restraints for a successful audit. This type of report is issued when the auditor feels their access was limited or getting satisfactory answers to their questions was challenging. This report means the auditor thought they couldn’t issue a definitive opinion on the nonprofit.
4. Disclaimer of Opinion – This type of report shows a company is not compliant with GAAP guidelines and portrays gross misstatements on its assets and liabilities. This type of report discovers financial misappropriation, irregularities, and inconsistent financial information.

Receiving the first two types of reports means your nonprofit is in a good place or has a few items to work on. However, receiving an adverse or disclaimer report can seriously impact the nonprofit’s fundraising efforts. Regardless of the report type, it’s essential to develop and implement a corrective action plan to reduce audit findings in subsequent years (e.g., improving policies and procedures and strengthening internal controls). While there aren’t immediate, governed repercussions to receiving an adverse or disclaimer of opinion reports, it is imperative to address the concerns identified in the report before the next audit. The board of directors should review the report and decide the steps necessary to correct and identify these in their corrective action plan. Audit findings are commonly addressed in grant applications; having a plan in place will streamline this and articulate the actions taken to potential funders.

Nonprofits are not always required to have an independent audit completed. Here are the circumstances that may trigger an audit requirement:

• Federal, state, and local government contracts may require an audit as part of the nonprofit’s contract for funding.
• State laws vary, but many require an independent audit when revenues surpass a certain threshold, such as $250,000.
• Nonprofits spending $750,000 or more of federal (or federal pass-through) funds in a year must complete a Single Audit. Proposed Uniform Guidance revisions in 2024 include increasing this amount to $1 million.
• Some states may require nonprofits to submit audited financial statements when registering for state charitable solicitations/fundraising.
• Audits may be required by private foundations when submitting a grant proposal or by banks as a loan requirement.

How Do I Find an Auditor?

Selecting an auditor should always follow the nonprofit’s purchasing and procurement guidelines; at a minimum, a request for proposals should be used. It’s a good idea to develop these guidelines in alignment with the federal procurement guidelines, or the state’s guidelines, if more restrictive. An external party must conduct independent audits and cannot be a member of the board of directors. In addition, the firm conducting the audit should be changed every three years. To find referrals, talk with the nonprofit’s accounting partner (if outsourced), board members, or trusted nonprofits. An auditor with nonprofit experience ensures they know the “ins and outs” of a 501c3 organization.

An Audit Costs How Much?

The cost of an independent audit varies by geographic region and the nonprofit’s size. The price is generally based on the amount of time required and the number of auditors. CharityCFO says a nonprofit audit can easily cost upwards of $10,000 (this is informational only and should not be used as a quote).

What can a small nonprofit do if it wants to be transparent but the price tag is too high? First, be aware of the contract requirements before signing an agreement. Second, ask a foundation if they would accept a more affordable method of evaluating the nonprofit’s financial position. Some foundations, especially those focused on serving grassroots and rural causes, understand the barriers a small nonprofit can face. Alternative options may include:

• Financial Review – an independent auditor’s objective review of a nonprofit’s financial statements. This activity does not use in-depth testing like an audit; however, it reviews for material issues and GAAP deviations at a broader level. This can be half to a third of the cost of an independent audit.
• Compilation of Financial Statements ­– financial records of a nonprofit formatted by accounting standards. When completed by an auditor, they are required to assess if records are free from obvious errors. This is a trained set of eyes reviewing financial records and formatting them according to GAAP standards. This can be in the $500-$5,000 range.

Nonprofits may choose not to conduct an independent audit every year; some may do this every other year or when there is a significant change in their financial situation. In the off-year, a nonprofit may have a review or compilation completed instead. However, there needs to be an understanding of the nonprofit requirements within existing contracts. Nonprofits should know that these documents are not the same as an audit.

For more information on common grant attachments, check out AGS’ on-demand training that discusses the purpose and how to present attachments in the best possible light. AGS is excited to offer a six-session Capacity Building for Small Organizations live series in Spring 2024.

This blog post is aligned with the Grant Professional Certification Institute’s Competencies and Skills.

Competency #2: Knowledge of organizational development as it pertains to grant-seeking

Skill 2.1: Assess organizations’ capacity for grant-seeking

Skill 2.3: Identify methods for assisting organizations to implement practices that advance grant readiness