Why to Invest in Audited Financial Statements
Understandably, many smaller nonprofits decide against investing in audited financial statements: when every dollar you spend decides whether or not you can carry out your programs, it’s difficult to justify the cost. Depending on where you’re located, it can be expensive. And, if you have a small or entirely volunteer-led staff, the audit process can be time-intensive. However, as you’ll see in this post describing the audit process, having audited financial statements can serve as leverage to gain future funding.
What is an audit?
Audited financial statements, also called simply an audit or audit report, are completed by a licensed Certified Public Accountant (CPA) firm. A typical audit report will include:
Opening narrative, which describes the firm’s opinion of the financial statements and outlines the responsibilities of the nonprofit’s management and auditors with regard to the financial statements.
Statement of Financial Position, which lays out the organization’s assets, liabilities, and net assets as of a specific date (usually the last day of the nonprofit’s fiscal year). You might hear the SFP referred to as the Balance Sheet.
Statement of Activities, which shows the nonprofit’s revenues and expenses for the entire fiscal year, is typically presented with or without donor restrictions, and shows how the nonprofit’s activities impacted its net assets. You might refer to this as the Income Statement or Profit & Loss Statement.
Statement of Functional Expenses, which categorizes the expenses from the Statement of Activities into Program Services, General and Administrative, and Fundraising expenses.
Statement of Cash Flows, which outlines cash flows from operating, investing and financing activities to demonstrate the nonprofit’s change in cash and cash equivalents throughout the fiscal year.
Notes to financial statements, which provide more detail on how the financial statements have been prepared, as well as provide context for the nonprofit’s investments and/or borrowing.
Are nonprofits required to conduct audits? If not, is there a budget threshold at which my nonprofit should invest in one?
Whether your nonprofit is required to submit to an audit depends on laws and regulations in your state, as well as whether (and to what extent) you receive government funding. In the state of Louisiana, for instance, nonprofits that receive $500,000 or more of public revenue in a year must submit to an audit. Nonprofits that spend $750,000 or more of federal funding in a year have to submit to a single audit, which evaluates both your financial statements and your federal compliance. In both of these examples, there is a certain government department that is charged with collecting audits. Read your government grant contracts closely to find out whether these rules might apply to your nonprofit.
Three reasons to invest in audited financial statements
Not having an audit leaves funding on the table
Although your nonprofit might not be required by law to conduct an audit, many private foundations do require one as part of their application process. Considering that private foundations grant around $107 billion annually (Candid) and there are 1.8 million registered nonprofits (as of 2021), that’s a lot of money flowing through the system. While the work required to submit a foundation application can vary widely from one funder to another, being able to upload your most recent audit can be one of the easiest steps in a grant application.
Keeps your financial house in order
The process of collecting data for an audit and responding to the audit report helps refine your nonprofit’s financial process, including internal controls like the segregation of duties. I’ve written a little bit about how keeping your grant documentation organized helps at audit time. Being able to put your fingers immediately on the information the auditor requires (e.g., a copy of your grant check, your agreement with the funder) makes it that much easier to keep your finances clean.
Fosters trust and transparency with funders
Your audit process takes a lot of work: for an efficient audit process, your financials need to be organized. Your board and committees also need to be engaged throughout the process. Ultimately, because of the coordination and effort it takes to carry out an audit, funders will understand that your nonprofit has the capacity to manage their funding.
Learn more about audits
The National Council of Nonprofits has an extensive guide about the nonprofit audit process, and it also includes a 50-state guide to audit requirements. If your nonprofit doesn’t already conduct an annual audit, this is a great place to start to learn more, like how to find a CPA who specializes in nonprofit audits.
If you don’t already conduct annual audits, I encourage you to closely review your grant applications and contracts to be sure you understand your funders’ requirements. Even if an audit isn’t required, your nonprofit might see the benefit of funding that hasn’t been available to you in the past. If cost is a concern, some funders might offer capacity-building grants to support this process for you.
Cover Photo by Scott Graham on Unsplash