If you work in the world of nonprofits, there’s a good chance you are familiar with the idea of having an annual, independent, not-for-profit audit by a CPA.
You may be required to have an audit by your funding sources or by state law (in your home state or where you solicit contributions). But even if it is not a requirement, there may still be very good reasons for requesting a not-for-profit audit.
But there may also be another option that you haven’t considered yet…
Not-for-profit audits vs. financial statement reviews
Having a voluntary audit may be a good option, but you may also decide that your small not-for-profit is not quite ready to take that step. After all, these audits can be expensive and may involve a huge amount of work for everyone concerned.
A less expensive, less invasive, version of a not-for-profit audit is the financial statement review, sometimes informally known as a financial review, or a CPA review.
Let’s look at the main differences below:
- Auditor’s goal is to express an opinion on the reliability of the organization’s financial statements.
- When third parties (banks, foundations, etc.) require a non-profit’s financial statements to make decisions concerning the organization, they prefer audited financials as they tend to be more reliable than unaudited financials.
- In order to express a “high level of assurance” that the information in the not-for-profit’s financial statements is reliable, the auditor conducts extensive procedures, including the examination of documents and direct communication with third parties, like grantors.
- The auditor also evaluates the organization’s overall system of internal controls in order to identify problem areas in the financials that might deserve extra scrutiny.
- At the end of the process, the auditor issues a report that expresses a formal opinion on the reliability of the financial statements.
- If, during the course of the audit, the auditor identifies problems in internal control, then the auditor may also communicate these to you in writing, especially if the findings are “significant deficiencies” or “material weaknesses”.
- In a review, an independent CPA is engaged to provide limited assurance rather than high assurance that the financial statements are reliable.
- To get this moderate comfort level with the financial statements, the reviewer will look at some of the documents examined during an audit, and present many questions to management, analyzing the numbers in order to identify potential issue areas.
- There is no assessment of the overall internal control structure.
- The CPA may “stumble upon” issues with internal control and present them to management and the board but there is no active search for these issues, as there is with a not-for-profit audit.
- Due to the reduced scope, the reviewer is not able to express a formal opinion on the financials.
- The report will indicate that the CPA is unaware of any material misstatements in the financial statements (with the implication being that there could be material misstatements that have not been detected).
Not-for-profit audit or review? Other factors to consider…
In both audits and reviews, the CPA may find material errors (e.g. pledges missing from the financial statements, in-kind support not recorded, etc.) and will propose to management that they correct the errors. Provided that management corrects the errors, the independent CPA will issue an unmodified report.
Some funding sources and banks will accept a review instead of an audit. Reviews tend to work well for smaller organizations (e.g. annual budget under $1M) that cannot afford a full audit.
A review fee can often be about half the cost of an audit. It’s an opportunity for small non-profits to get periodic meaningful fiscal expertise, especially if they don’t have a finance director. A review can be like a “dress rehearsal” for startup organizations that have never had an audit but are growing and know it will be required in the next few years.
Are all reviews the same? No. The reviewing CPA has a lot of flexibility in choosing which procedures to employ. Some reviewers do a site visit at the organization, while others manage everything “virtually”.
When talking with a potential reviewer, ask what types of procedures they employ, as there are a number of different approaches. While they probably won’t give you a detailed description of their methodology (nor should they), they should be able to give you a copy of their PBC (or ‘prepared by client’) checklist, which will give you an idea of what kinds of documents they will test.
Also, when considering a potential reviewer, find out how much experience they have with not-for-profits: their operational and financial considerations differ considerably from traditional business enterprises.
Finally, find out if they offer any “value-added” services such as a management letter, benchmarking or trend analysis, which can enhance the organization’s experience.
When a comprehensive not-for-profit audit is not required, a financial statement review provides an excellent alternative with a reduced scope for organizations – involving less expense and less effort on your part.