In our previous article, we discussed the thresholds that trigger an audit requirement for nonprofit organizations. But what if a nonprofit organization with less than $2 million would like audited financials? The benefits may be worth the extra time and money spent.
In California, a nonprofit organization is required to have its financial statements audited by an independent CPA when its gross annual revenue exceeds $2 million. However, a nonprofit organization might want to consider conducting an audit even when the law does not require it. A cost-benefit analysis should be considered by the board of the organization to determine whether an audit is appropriate as the advantages may very well outweigh the cost.
- One advantage of an audit is its ability to offer financial transparency. It is difficult to put a price on the peace of mind that financial transparency can provide to an organization’s board, donors, and to the public. Audited financial statements can express the board’s confidence in the organization’s activities and best practices, regardless of minimum thresholds.
- A published independent audit report may even increase donations. Donors want to ensure their contributions are being used properly and going to organizations with internal controls with thorough financial reporting processes. Audited financial statements displayed for the world’s viewing can do just that.
- Additionally, an organization can increase revenues with audited financial statements when applying for grants and funding. Many private and public foundations actually require nonprofit organizations to conduct an audit to be eligible for their funding. Audited financial statements provide assurance to funders that the organization’s operations are free of material misstatements. Again, it shows the organization’s integrity and willingness to be transparent to its donors.
While the consistent publication of audited financial statements can open doors for the nonprofit organization, the aforementioned cost-benefit analysis should always be reviewed. For instance, if the nonprofit is considering applying for a $5,000 grant and the funder requires audited financial statements, the process may not be financially worth it. Increase the grant to $50,000 and the organization has a good argument to conduct an audit. For smaller organizations that desire financial transparency, the board may consider a review or compilation as a viable lower-cost alternative.
Please feel free to contact your L&B professional at 858-558-9200 to further discuss these details.