Should you have an audit?
Do you need an audit?

As you may know, the accounting profession has adopted new standards for audits that have materially increased the cost of all audits for years ending after December 15, 2007. These new audit standards are mandatory and have caused the cost of audits to increase 15% – 20% – 30% or more because of the additional work auditors are forced to do. Moreover, the cost to the client is increased beyond the audit fee because of the additional time it takes your staff to help our staff through the audit under the new standards. Some smaller nonprofits that do not have competent accounting staff on board are now required to hire outside help to prepare the work papers and make the year-end adjustments that we, as auditors routinely prepared/made as part of our audit work, but can no longer do under the new standards.

Audits under the new standards are expensive. Do you really need to have one? An audit is always a good idea if you can afford one. It gives a level of comfort to your board and to funding sources. Nonprofit governance experts always recommend an audit as part of a board’s fiduciary responsibility. Does your board and staff actually use or even review the audit? Is it just filed away? Can some of the money you annually spend on the audit be better spent on improving the services you provide to the community?

There are some alternatives to the audit I will present to you. Before that, you need to ask the question: Am I required to have an audit? By-laws of many nonprofits require an annual audit. By-laws can be amended. If you are a Massachusetts nonprofit required to register with the Commonwealth’s attorney general (Form PC), you have to have an audit if your gross receipts are more than $500,000 for the reporting year. For Rhode Island nonprofits, the Department of Business Regulation requires you to have an audit if you have gross receipts of more than $500,000, you are seeking to raise $25,000 or more from the general public (defined as small businesses and individuals) and you are not a school, church or some other excepted organization. Most funding sources dispensing federal funds to you will make you adhere to the OMB Circular A-133 audit requirements which mandate an audit under A-133 and GAO “yellow-book” standards if your federal source funds are more than $500,000 in your fiscal year. In addition, some governmental funding sources mandate an audit and many foundations request that you send them a copy of your latest audit report with your funding proposal.

Our experience is that you have to adhere to the Mass PC, RI Department of Business Regulation and OMB audit standards, but you may get a state or city funding source to waive the audit requirement or accept a much cheaper “agreed upon procedures” audit of their contract instead of a full agency audit. We are not aware of any foundation that has denied funding to any of our clients because they did not submit an audit report with their funding proposal. Foundations will accept compiled or reviewed financials or even an internally prepared financial statement or an IRS Form 990 in lieu of an audit, but you should confirm this with the specific foundation before you make your decision.

What are your alternatives? There are three (3) levels of financial statements that we as CPAs prepare for our clients; audited financials, reviewed financials and compiled financials. The financial statements themselves can be the same in all three (3) reporting alternatives; what is different is the accountant’s letter.

• In audited financial statements, the CPA report says that it has audited the financial statements under generally accepted auditing standards and that the financial statements present fairly the financial position and performance of the entity in conformance with generally accepted accounting principles. That is the CPA firm expresses an opinion on the financial statements after applying a set of auditing techniques and obtaining evidentiary data from you. Notice that the letter will say presents fairly, not exactly. That’s because accounting is an art not a science. Give two (2) similarly qualified CPAs the same minimally complicated organizations to audit; the odds are very good that they will produce two (2) different sets of financial statements. If you are looking for total verification of an organization’s financial statements, the financial statement audit does not accomplish it. Total verification involves a forensic audit which is always very, very expensive.
• A step down from audited financials is reviewed financials. In a review, the CPA report says that the firm has reviewed your financial statements under professional standards. The report further says that we express no opinion on the financials except nothing came to our attention when performing the review that would lead us to believe that they are materially misstated. Reviews cost typically around 40-60% of the cost of an audit.
• The third level of financial statement presentation is compiled financials. In a compilation engagement, the CPA takes your financial data and puts it into proper nonprofit financial statement format. No work may be done analyzing the figures unless something unusual about your information comes to our attention when we look at your data to prepare the financials. Our CPA report states that we have compiled the statements under professional standards but we express no opinion or other form of assurance on them. In other words, the statements could be compiled from financial information completely made up by you!!! Compiled financials typically cost 50% or less than the cost of a review.

In audit and review engagements we issue a management letter on areas we discovered during our work where the nonprofit can improve upon its financial or general management procedures. We do not issue management letters under compilation engagements.

“Agreed upon procedures” engagements are engagements where the CPA firm and the client agree on specific procedures you want us to perform on a limited set of financial data. We will then perform these procedures and issue a report to you typically in letter form which summarizes our results in performing the work. This kind of work is becoming more common with government contracts where the contract specifies an annual audit but after petition from you, the funding source agrees to waive the annual audit in favor of an agreed upon procedures review of its specific contract. The cost of this work varies greatly depending on what we are asked to do but it combined with a review or compiled set of financials will still be far less costly than an annual financial statement audit.

I hope you have found this helpful. Please share it with your Board of Directors. If you have questions, we would be pleased if you would call on us.