Independent audits are a topic of frequent discussion amongst charitable nonprofit organizations. Nonprofits are often required to get an independent audit for many different reasons. However, for some nonprofits there is no requirement for an independent audit to be conducted. In these cases, the question is raised as to whether it would still be beneficial to receive an independent audit.
In this article we discuss what independent audits are, the common reasons they are required, and the benefits nonprofits receive by getting independent audits—even when there is no requirement to do so.
What is an Independent Audit?
During an independent audit, a charitable nonprofit’s accounts, business transactions, accounting practices, internal controls, and financial records are examined by an independent, licensed certified public accountant (CPA). The fact that the CPA conducting the audit is independent is significant because it means the CPA is not an employee or stakeholder of the nonprofit. This independent aspect ensures that there is not a conflict of interest between the auditor and the nonprofit. After the examination is complete, the auditor reports whether generally accepted accounting principles (GAAP) were followed, which speaks to the credibility of the financial practices and reporting of the nonprofit.
Common Reasons Independent Audits are Required for Nonprofits
Your charitable nonprofit may or may not be required to get an independent audit. Here are some of the most common reasons that nonprofits are required to be independently audited:
- Local, state, and federal governments may require that a copy of the nonprofit’s audited financial statements is kept on file.
- Charitable nonprofits that receive $750,000 or more in federal funds in a year are required to get an A-133 audit (also known as a “Single Audit”). Single Audits are far more rigorous in scope than standard independent audits.
- Nonprofits that have contracts with state and local governments to provide services to the community may be required to get independent audits.
- Some states require nonprofits to provide a copy of their independent audit when they register with the state to legally conduct fundraising activities.
- Nonprofits may be required to submit a copy of their independent audit when applying for grants.
- In order to obtain a loan, some banks require that a nonprofit receive an independent audit.
This list is not exhaustive, and nonprofits may be required to get an independent audit for a variety of different reasons. Nonprofits should consult with their CPA firm and legal counsel to ensure they are in compliance with any audit requirements.
3 Key Benefits of Independent Audits for Nonprofits
Many charitable nonprofits ask if they should get an independent audit even if there is no requirement to do so. There are several reasons why nonprofits should consider getting an independent audit.
For example, some charity watchdogs such as CharityWatch and Charity Navigator factor into their ratings whether a charitable nonprofit receives annual independent audits regardless of legal requirements. For other nonprofits, the board of directors simply wants an independent audit to ensure the financial statements don’t have any material misstatements.
Independent audit requirements for nonprofits vary from state to state. The National Council of Nonprofits provides a great resource on state-specific audit requirements. We strongly recommend new and existing nonprofits take the time to familiarize themselves with their respective state-specific and grant-specific audit requirements to ensure maximum compliance.
Builds Trust with Donors and the Public
By receiving an independent audit opinion, your nonprofit builds vital trust with donors and the public. The audit shows the community that your organization places a high priority on ethical financial management and is excellent steward of funds. Furthermore, audits increase donor and public confidence that your financial statements are accurate.
Increases Internal Adherence to Best Practices
When your nonprofit receives an audit from a CPA firm that specializes in nonprofit accounting practices, your accounting and finance staff stay up to date on current best practices. Additionally, knowing that an independent audit will occur each year will require your accounting staff to maintain a higher level of financial accountability throughout the year.
Enhances Fraud Deterrence
In addition to increased internal adherence to best practice accounting methods, annual independent audits strengthen your internal accounting controls. While not a guarantee, ill-intentioned staff or volunteers are less likely to commit financial fraud if they know annual independent audits will take place.
Goldin Group CPAs Provides Independent Audits for Charitable Nonprofits
At Goldin Group CPAs, one of our focus areas is GAAP accounting for nonprofit organizations. We help nonprofits determine if an independent audit would be beneficial and, if so, we help them prepare for their audits. For more information on independent audits for charitable nonprofits, contact Ariel Goldin, CPA, Director of Client Relations at firstname.lastname@example.org.