The regulations on nonprofit auditing vary from state to state. While there are federal laws that mandate audits for certain nonprofits, you should educate yourself on the laws in your state to determine whether you are legally required to undergo an audit. For example, the federal government requires that any nonprofit receiving above a certain amount in federal funding undergo a yearly audit. But there are still state regulations you must adhere to even if the federal law doesn't apply to you. Let’s review what an audit will actually entail.

Who performs the audit?

You must hire an independent CPA to review your financial statements. This individual must be entirely separate from your nonprofit—your in-house accountant cannot perform the audit. The purpose of the audit is to ensure that your nonprofit is adhering to the relevant generally accepted accounting principles. The auditor will examine items such as bank reconciliations, grants, donations received, board minutes, journals, and ledgers.

What are the results?

The auditor can give the following results:

• Unqualified Opinion (the best result, which is what you want to hear),
• Qualified Opinion (there were a few instances that the organization did not adhere to GAAP),
• Adverse Opinion (the organization as a whole is not following GAAP), or
• Disclaimer of Opinion (the auditor could not form a comprehensive opinion).

How does an audit help your nonprofit?

Legality aside, even if you aren't required by law to get your nonprofit audited, it's often still in your best interests to get one.

Are you planning on applying for grants to help fund your nonprofit? Most foundations and corporations require that a nonprofit be audited to even qualify for the grant. If you are planning to apply for any outside funding, including government funding, you might consider an audit a necessity.

Donors want to be assured that you are a trusted, reputable organization. Being open with your financial statements shows donors that you are trustworthy. There are even several websites that rate nonprofits on their reliability (see CharityWatch.com) based on, among other things, how often they volunteer to be audited.

Conveying transparency

Overall, having your nonprofit audited, whether you're legally required or not, conveys your transparency as an organization. By displaying that you have nothing to hide, you, in turn, brand yourself as a trustworthy organization. Being transparent about your finances will help you build relationships in the community and with donors.

If you have questions about audits for your nonprofit, contact our Nonprofit Team to learn more.

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