How are you handling your nonprofit’s audits?
Internal audits are a great way to promote fiscal responsibility, but they’re not always the most reliable. Because the auditor is an employee of the organization with a vested interest, it can be challenging to conduct a neutral analysis.
An external auditor, on the other hand, has no affiliation with your nonprofit. They are typically CPAs who are hired to conduct a thorough review of all financial statements to ensure they fairly represent the entity. In other words, they verify the work of internal auditors — which can be beneficial to your organization for several reasons:
- Mitigate potential risks. External auditors are in a better position to spot discrepancies that can paint an inaccurate picture of your nonprofit’s finances. They can help board members identity any unethical practices or internal errors that could compromise the integrity of the organization.
- Perform a thorough analysis. The auditor will delve into balance sheets and cash flow statements, as well as leases, mortgages, donations, budgets and more. They may also interview your board members and your employees to learn more about internal controls.
- Offer outside expertise. Following their review, the external auditor will share their assessment with your organization’s audit committee. They may make recommendations on how to improve your processes and procedures, and safeguard assets. They will also answer any questions raised during the investigation.
- Strengthen donor potential. Did you know that charity rating websites take into account whether a nonprofit undergoes an external yearly audit? Donors may be more likely to contribute to a charitable organization with this distinction.
Preparing for an external audit
An external audit is usually performed at the close of an organization’s fiscal year. To streamline the process, begin by compiling the financial documentation that the auditor will likely need. This includes:
- Banking and financial statements
- Payroll documents
- Accounts receivable and accounts payable records
- Mortgage statements or leases
- Board meeting minutes
In addition, it’s important to share any factors or legal matters that may have impacted the organization’s reporting and recordkeeping. So be sure to collect any related documentation.
Guide your organization to a healthier financial future
Some nonprofits, because of the size of their annual budgets, or because they receive federal or state funding, are required by law to conduct an independent audit.
In other situations, a charitable nonprofit has a choice whether or not to conduct an independent audit. If you’re among the latter, you may choose to invest in an audit for the reasons mentioned above. If you need help determining if an audit would benefit your organization, give us a call at (973) 301-2300 to learn more.