NFP Partners provides services to a variety of nonprofits, including participating in the madness of preparing for the annual audit. We often have conversations with our nonprofit clients regarding the necessity of an audit and if a rotation of audit firms is a “best” practice. Throughout the year, we work with clients to ensure that our tracking schedules (temp restrictions, prepaid expenses, deferred revenue, receivables and liabilities) are up to date, bank reconciliations are completed, balance sheet accounts are reviewed and reconciled, internal control procedures are followed and budget variance explanations are prepared. Even with having those things all done timely during the year, it still seems to take forever to complete and compile the requirements of the auditor’s PBC (prepared by client) list. The long and short of it is that there’s an investment in time and expense to prepare for an audit. For a small nonprofit, the audit preparation costs – plus the fees – may be difficult for the budget to handle. For any size nonprofit, an audit firm rotation requires an investment in orienting the new firm to the organization in addition to the preparation costs.
So, should a small nonprofit opt for a financial review instead of an independent audit? There are circumstances that may trigger the requirement for an independent audit. These include:
- Specific requirements of foundation, federal, state or local government funders
- Requirement of submission to the state for the annual charitable solicitations reports
- Requirement of financial institutions for loan transactions
- Requirement of an additional A-133 audit if the expenditure of federal funds is in excess of $750,000 in the fiscal year
If a nonprofit does not meet the above requirements, a financial review is an option. So what does a financial “review” entail and how is it different from an audit? The “review” is conducted by an independent auditor and examines the organization’s financial statements to determine whether they are consistent with generally accepted accounting principles. The auditor does not conduct the same level of analysis or include an examination of internal controls. A review will provide some assurance of the financial statements through a review for material issues and obvious deviations from GAAP, but testing of transactions is not conducted.
So, should any nonprofit solicit and rotate audit firms on a regular basis? For most nonprofits, there is no requirement to rotate audit firms and is unique to each organization and their circumstances. At the core, nonprofits should ensure they are receiving a quality audit, regardless of the decision to rotate audit firms. Here are some considerations:
- Are financial statements prepared by a qualified accounting professional and reviewed by the board of directors regularly?
- Are there strong internal controls and segregation of duties?
- Is the budget prepared and approved by the board of directors? Are variances explained an understood?
- Is there an audit committee that hires and communicates with the audit firm?
- Is the auditor qualified and experienced in the organization’s industry?
- Would a rotation of partners accomplish the same as an audit firm change?
So, as you continue to get through your audit madness, we understand and continue to evaluate (with our clients) what is the best use of each nonprofit’s resources. I think most nonprofits know the value of an independent audit but should ask the question: could our resources be used better? Is alternating a review with an audit an option? Could we simply change audit partners instead of rotating firms? Will doing these things still gain us the confidence of funders and donors and provide assurance to the Board of Directors that the financial statements are free from material misstatement?