Do we need an audit?

I hope everyone had a restful weekend! Are you December-31st-close people finishing up year-end? More importantly, is everyone sticking to their resolutions? I’m proud to say that I’ve gone to yoga once a week! It’s amazing how much better I stick to something when I simply put it in my calendar and treat it as I would a doctor’s appointment. Non-negotiable, not cancellable, not available for anything else during this time. Let’s keep it up!

We talked last week about how to prep for an audit and I’m here this morning to talk about those organizations who are in the initial phases of growth (less than $1M) and haven’t yet had an audit. They’re not sure if they need an audit and once they decide they do, they have no idea how to find the right auditor.

Let’s tackle this head on!

First, what is an audit? Is it when the big, scary IRS comes in and rifles through all your files and you’re in trouble? No way! This is when you choose an independent auditor to come in and assess not only your books but also your policies and internal controls, then they hand you a neatly comprised set of financials that you can then share with donors, funders and other stakeholders. Also, you pay them.

Now that we’ve got that cleared up, does my organization really need an independent auditor? There are a few factors to consider here:

What state are you incorporated/registered in? Each state has different audit requirements. Are you registered in any other states? Oftentimes, organizations will register in a number of states in order to fundraise there and those states may require audited financials. Here is a great guide of state-by-state audit requirements and links to statutes. [Please always consult your legal counsel before making any decisions – sites like this could be outdated!]

Who are your funders? Many private foundations and government agencies will require audited financials along with grant or contract applications. If they don’t require an up-front audit, they may require one when you spend above a certain threshold of federal funds in a year (currently $750,000).

The IRS requires nonprofits to complete the 990 but does not require an independent audit. Part XII Financial Statements and Reporting of the 990 asks whether or not the organization has had an independent audit and, as you probably know, this form is public information.

In short, even if your organization manages to squeak by without technically needing an audit, it is certainly a best practice because:

  • You’ll gain the credibility and confidence of funders and promote financial transparency of the organization.
  • Your organization will potentially be eligible for new and different sources of funding as well as ratings by the important charity watchdog organizations (Charity Navigator, Guidestar, etc).
  • Finally, and maybe most importantly, it’s an opportunity to do a deep dive into your policies and procedures to ensure you’re using your limited resources most efficiently.

Here at 100 Degrees Consulting, we are all about BEST PRACTICES!

Come back tomorrow for the second installment of this thrilling series: Okay, let’s do it. Now how do I find an auditor?