Nonprofit Audit vs. Financial Review and Rotating Audit Firms

by | Jan 3, 2019

NFP Partners provides services to a variety of nonprofits and as a part of the services, we participate in the madness of helping them prepare for their 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 our tracking schedules are up to date. This includes looking at temp restrictions, prepaid expenses, deferred revenue, receivables, and liabilities. We also ensure the following:

  • Bank reconciliations are completed
  • Balance sheet accounts are reviewed and reconciled
  • Internal control procedures are in place and followed
  • Budget variance explanations are prepared.

Even with having those things 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 there is an investment in time and expense to prepare for an audit.

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. For a small nonprofit, the audit preparation costs, plus the fees, may be difficult for the budget to handle.

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:

  • A requirement of submission to the state for the annual charitable solicitations reports
  • Specific requirements of foundation, federal, state or local government funders
  • A requirement of financial institutions for loan transactions
  • A requirement of an additional A-133 audit if the expenditure of federal funds is more than $750,000 in the fiscal year

If none of the above apply, a financial review is an option. What does a financial review entail and how is it different from an audit? Specifically, the review is conducted by an independent auditor and examines the organization’s financial statements. Its goal is to determine whether the statements are consistent with generally accepted accounting principles (GAAP).

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 and recognize material issues and obvious deviations from GAAP, but testing of transactions is not conducted.

Should a 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?
  • Is the budget prepared and approved by the Board? Are variances explained and 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 who are responsible for oversight accomplish the same as an audit firm change?

As you prepare for your next audit, we understand the investment and continue to evaluate with our clients what is the best use of each nonprofit’s resources. Most nonprofits know the value of an independent audit, but should ask the questions, could our resources be used better?  Finally, 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?

If you are interested in an evaluation of your organization’s audit or financial review options give us a call. We would be happy to discuss the pros and cons. If you’re overwhelmed and would like to learn more about audits through an outsourcing lens, visit our Ultimate Guide to Outsourced Nonprofit Accounting.