“The auditors are coming! The auditors are coming!” The news is not quite as harrowing as “The Redcoats are coming!” was to American Revolutionaries, but as an employee of a nonprofit that’s being audited – your palms will sweat! The presence of auditors in the workplace is, at a minimum, a disruption of your workflow. Auditors need information. They need reports and data. They need answers.
A recent survey conducted by Abila indicates the most common challenge nonprofit finance professionals face on a daily basis is interruption from other departments – and that can certainly include requests from auditors. But despite the extra work, obtaining a top-notch audit is critical to the mission and funding of your organization.
An audit provides the highest level of assurance that an organization’s financial statements are fairly presented and free of misstatements. But, audits cost time and significant budget resources. How can you be assured the money is wisely spent, staff time on the audit is minimized, and a reliable audit is obtained?
Only independent CPAs may perform audits, but a well-chosen audit committee can help make the process run more smoothly, save money, and set the stage for a fair audit.
Select an audit committee from your board or general membership. Good choices include those familiar with how organizational activities are reflected in the financial statements and those who possess an understanding of the audit process. Individuals with business experience – perhaps bankers, internal auditors, and corporate officers – are prime candidates to serve on an audit committee. Committee members should not be engaged in current financial transactions for the organization.
Establish a charter for the audit committee. The charter should outline member roles and responsibilities, keeping in mind legal requirements for the audits needed by the organization. The audit committee will choose the external auditors and meet with them to monitor their services and activities and to ensure the auditors’ independence is maintained.
Choosing an Auditor
The validity of the audit is dependent upon the ability of the external auditors to be objective. The Council of Nonprofits recommends hiring separate firms for consulting services and audit services to avoid a conflict of interest. Here are some steps an audit committee can take toward obtaining a reliable audit.
- Develop goals and objectives. Some states have regulatory requirements for an audit. Even when no legal requirement exists, many grantors require an audit. Boards use audits as reassurance that the financial information they rely on for oversight of the organization is accurate and complete. Consider this purpose when establishing audit goals.
- Search for firms licensed in your state and experienced with nonprofit work. Ask for copies of peer reviews, and verify professional association memberships. Certain professional organizations, such as the AICPA, require CPAs to adhere to ethical standards of service. Abila Business Partner Wipfli suggests searching the Federal Audit Clearinghouse website for firms that have performed a significant number of single audits as an indicator of audit experience.
- Use a request for proposal (RFP) process. All responses to your request should include the objective and scope of the audit. Consider the responsiveness of the firm to your request when selecting a firm. If they don’t provide timely responses to the proposal process, how will their response time be when you are a client?
- Ask about team rotation. The Sarbanes-Oxley Act (SOX) requires publicly-traded companies to rotate lead auditors, a practice that can be valuable for nonprofit organizations. Having fresh eyes evaluate the data each year means the team is less likely to overlook something, because of a long-standing relationship with the client.
- Review PCAOB Inspections. The Public Company Accounting Oversight Board oversees audits of public companies by promoting informative, accurate, and independent audit reports. Monika Causholli, Associate Professor of the University of Kentucky, suggests that while it is difficult for clients to evaluate the auditor’s quality of work, since clients are not in the auditing business, audit committees should have conversations with their auditor regarding the findings of their PCAOB inspections.
Selecting a qualified audit firm is essential to getting a thorough audit. Geogre O. Persekian, Senior Consultant for Nonprofit Government Practice at Wipfli LLP, says the biggest consequence of an incomplete audit is not receiving an unqualified opinion, which could result in loss of funding.
A sensibly selected audit committee with a proper charter conveys a message of independence, reliability, and trust. As the liaison between the auditors and management, a quality audit committee can facilitate a quality audit. It also fosters confidence among present and potential endowment providers, trusts, and top-level donors – all necessary to the success of nonprofits.