Seven Ways to Reduce Your Audit Costs

Too many of us think of audit costs as an expense to suffer, not to manage. CPA Dennis Walsh tells us differently:

Executive Director Blair Benson of the Mental Health Association in Greensboro, North Carolina, was hoping her audit costs wouldn't go up much. With a budget of $340,000, there isn't a lot to spare. But although she had expected an increase, she was stunned when her auditor said he would be increasing his fee by 40%. "An increase like this is something you just can't build into your budget," said Benson.

Audits are getting more expensive -- have you noticed?

A survey of 160 community-based nonprofits in Guilford County, North Carolina, showed recent average audit fee increases of 9%, and noted that audit costs remain a significant burden to organizations.

Under the new risk-based audit standards (Statements on Auditing Standards (SAS) Nos. 104-111), effective since 2007, your auditors must obtain a deeper understanding of your organization, its environment, and your internal control systems. "The burden for documentation, combined with the additional scrutiny by the AICPA  . . .  and the federal Office of Management and Budget (OMB) . . .  has required dramatic increases in both time and fees of CPAs, commented Max Mertz, CPA, a partner with Elgee Rehfeld Mertz in Juneau, Alaska.

And it's not just the auditors whose hours on the job are increasing. Staff time on the audit has expanded as they're forced to respond to more in-depth audit inquiries concerning internal controls and the presence of risk.

Easing the cost burden

1. Consider not having an audit. The 2005 Panel on the Nonprofit Sector convened by the national Independent Sector recommended that audits be undertaken by organizations with $2 million or more in total annual revenues. Alternatively, would users of your audit report accept your IRS Form 990 as a substitute? Considerable resources are spent preparing the annual 990 and it is submitted to the IRS as correct and complete under penalties of perjury.  It includes a good deal about activities and governance, and in most respects the financial information mirrors data reported under generally accepted accounting principles (GAAP).

When determining whether you need an audit, the first question you should consider is: Who's asking for the audit?  If your audit isn't mandated but you're wondering if one might be expected anyway, refer to an earlier Blue Avocado article "Is it Time for an Audit?" for a good discussion on this point.  If you're still unsettled, seek advice from a second CPA, your legal counsel, or your nonprofit associations. 

2. Instead of an audit, consider using a different kind of CPA report. CPA services are classified by the level of assurance provided to the user of the report. And fees for these services are set accordingly; one rule-of-thumb is that a review costs about 1/3 of an audit.

  • In an audit, the CPA expresses an opinion as to the legitimacy and completeness of the financial statements. The CPA bases his or her opinion on the results of test procedures and an evaluation of internal control.
  • A review, in contrast, is a lower level of assurance on the reliability of the financial statements. The auditor applies analytical procedures coupled with inquiries of management.  The CPA attests that he is not aware of any material modifications needed for the financial statements to be in accordance with GAAP. The Panel on the Nonprofit Sector recommended that organizations with annual revenues of more than $500,000 but less than $2 million obtain reviews rather than audits.

     

    For one attorney's advice to a nonprofit to have a review rather than an audit, see here.

  • For a compilation, the CPA takes information supplied by management and prepares financial statements.  The accountant does not perform any procedures to verify management's information and therefore does not provide any assurance. The accountant's duty is to determine that they are free from obvious material error.
  • In a lesser-known service, known as agreed upon procedures (AUP), the accountant performs audit-type procedures on limited subject matter and reports on the results without expressing an opinion on the findings.  The procedures are selected by the user of the report and agreed to by the parties in advance.  For example, if the main reason for your audit is that one foundation wants evidence that  you used their grant funds appropriately, the AUP would look only at the use of those grant funds. For an AUP engagement to be effective, the user of the report must be comfortable accepting responsibility for the adequacy of the procedures and for evaluating the findings.
    For more about agreed upon procedures and a real life example of how small nonprofits benefit from such a service, see our sidebar "An AUP Success Story."

3. Talk to your auditor about modifications, such as having the audit performed on the cash basis of accounting.

For example, a North Carolina nonprofit with a $200,000 budget received a $50,000 pass-through grant from the Department of Health and Human Services.  The audit requirement was absolute, but the audit firm was able to obtain permission to perform the audit on the cash basis of accounting, rather than the accrual basis as required by GAAP.  This saved the nonprofit approximately $2,000 in fees.

4. Negotiate with your auditor. Blair Benson of the Mental Health Association was successful in getting an 11% reduction from the requested fee increase.

5.   Also, be sure that your board and staff are working to correct any weaknesses in your systems of internal control as set forth in the auditor's SAS 112 management letter.  As a general rule, the weaker your systems, the more time the auditors will need to spend.

6. Consider changing auditors.

And, if you must, identify potential successors and submit a request for proposal to each. A smaller firm or a sole practitioner may be a better fit for your organization than a large firm. (See a sample audit RFP here.)  But be aware of the 'grass is always greener' syndrome -- a successor will usually need to spend substantially more time in the first-year engagement and the disruptive effects of changing practitioners will complicate matters as well.

7. A longer range strategy:

Work with other nonprofits to change state-mandated audit requirements for nonprofits. In Connecticut, passage of PA No.09-102 raised the legal requirement for nonprofit formal audits from $200,000 to $500,000, effective July 1, 2009. The Connecticut Society of CPAs, the Connecticut Council for Philanthropy, and the different state regulators all supported the wisdom of helping an estimated 500 nonprofits save $3 million in audit fees. In Minnesota, HF1298 (sec.191.34) increased the audit threshold from  $350,000, where it was set for the last twelve years, to $750,000, effective for nonprofits with a fiscal year ending July 1, 2008 or later. Nonprofits in Massachusetts and California have also succeeded in moving audit thresholds to higher levels, saving important dollars for thousands of nonprofits.

[Our thanks to National Council of Nonprofits for above paragraph.]

Concluding thought

The board has a duty to assure transparency and accountability by selecting an appropriate level of independent review, but it also has a duty not to consume resources unnecessarily in the exercise of its governance.  While you want to demonstrate good governance by supporting the most appropriate level of accountability, the important point is to become aware of your options before deciding on the type of CPA services that best fit your needs.

I look forward to answering your questions and responding to your comments as you post them below.

Dennis Walsh a certified public accountant who lives in Jamestown, North Carolina, is the author of Legal and Tax Issues for North Carolina Nonprofits. Through the Deborah and Dennis Walsh Foundation, he provides volunteer technical assistance to help empower community nonprofits. He can be reached at drwalsh at triad.rr.com.

 

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Comments

I direct a fairly new non-profit which writes less than 100 checks a year. We have strict internal controls, are PCI compliant, but I'm finding funders who require audits regardless of size. When is it worth the expense and hassle of an audit versus just forgetting that funding source?
Back in the day when costs were a lot less, I always believed an audit was worth it as a fund-raising expense because funders just looked at the signature and didn't worry about issues of financial responsibility. Is that still true?
Thanks,
Nancy Kirk

Nancy,

I think one implication of your question is whether an audit is really needed to demonstrate adequate transparency and accountability in your situation. In response to your second question, given all the buzz about accountability in recent years, I can’t imagine any funder ‘worth their salt’ that would not look beyond the audit report signature. Some of the other ways a nonprofit can express transparency are through posting of their financial statements and IRS Form 990 on their website. Posting relevant policies such as conflict of interest, document retention and whistleblower, and donation acceptance are also indicators of good governance and accountability. Jeanne Bell’s earlier piece (linked in the article) also speaks to this. See the section titled “Benefits of Audits.” In particular, a key question I would ask is whether the added assurance of an audit is important to your particular stakeholders. Ask them. I hope to hear some other reactions to your question as well.

Nancy,

I am at a United Way; How are you PCI compliant? What policy or practices did you implement?

Ray (rberry@uwpv.org)

Thank you for this wisdom. Is extremely helpful to us at less than $100,000 annual receipts per year. God bless you.
Love Your Neighbor Ministries

I am a program director, but held an ED position for a small non-profit ten years ago. We were chasing grants which required an audit, which we couldn't afford. I had a Board member who was a CPA. He worked out an arrangement with a collegue in another firm who was also on the Board of non-profit and they agreed to do the audits for each other's organizations free of charge. Both organizations had less than $250,000 in annual revenue so this probably wouldn't be a solution for large non-profits.
As to whether or not you need an audit. . . I would never consider serving on the Board of an organization that did not get an annual audit.

For those of you in New York State, a 2002 law requires audits of all NP's with budgets of $250k or more.

This requirement should be titled "Full Employment for CPAs Act."   :)

Most small nonprofits do not have a clue when it comes to financial accounting and reporting. Auditors spend most of their time fixing the messes made by people who think they are accountants. So, once again, you are wrong. Big surprise. And this article is a joke, too. Changing auditors raises the cost of audits in the long run. If I know you aren't going to be a loyal client, I will certainly not discount my fees. And, finally, ma'am, every one of my nonprofit clients benefit from my services. They would never be able to prepare an accurate Form 990 unless an audit were done to fix all the errors. You really don't know what you are talking about here. But, as usual, that doesn't stop you from trying to enlighten the rest of the idiots.

how hostile....
Small non-profits do need help, but what they don't need is some who is so negative about non-profits that you can't understand how much time and money this cost an organization running on a shoe string. Our auditor is now trying to charge us because he can't talk to the previous ED who resinged due to medical issues. We aren't trying to hid anything, but he wants a letter from our attorney stating that we aren't hiding anything which of course will cost more money. If you feel that we are idots than I think you should get away from non-profits and go somewhere where they know everything and don't need you!

What a jerk.

I believe Wisconsin has the same requirement

Of course our organization believes in accountability. However, this is a very complicated issue that our non-profit has been frustrated by for years. In Michigan, most local foundations and the local Community Foundation require an audit, regardless of what amount you are asking for. This is an awful issue for small non-profits. Foundations decided non profits needed audits. Where is the foundation to PAY for the audits? It is a gamble for a non-profit, especially smaller ones, who don't have the gov't grants where auditing funds are a part of the grant. For example, If our group gets an audit, we are eligible to apply for grants from many more funders. Maybe we will get a grant. Maybe not. Maybe that was $3,000 annually we could have spent on field trips, advocating for kids at school, healthy food or insurance. We don't like to gamble with our donor's money. According to our research, auditors of non-profits have to go through expensive training to do non-profit audits. It is not something that they often donate because of the cost of being trained for it. The other responders here are lucky to "know someone" who will do it. Should this issue be left to luck? The organizations who do individual low-income taxes for free know that there has been a gap in needs for audits/990 completion for nonprofits for a very long time. It is nonsense that charities should have to fundraise for this. Of course accountability is important, but charities funding a profession (the CPAs who are trained specially for non-profits) is certainly not what people have in mind when they write donation checks to charities. This is a long standing problem for charities that gets little notice, but kills off or stunts the growth of smaller nonprofits.
Jean Vortkamp
The Front Porch
Detroit, Michigan
frontporchdetroit@yahoo.com

Am I missing something? It appears that the 2005 Nonprofit Panel suggests an audit for organizations with annual revenues of $1 million or more, not $2 million or more as the article suggests.
See
http://www.nonprofitpanel.org/Report/final/Panel_Final_Report.pdf (page 37)
and
http://www.independentsector.org/PDFs/sarbanesoxley.pdf (page 3)

You're absolutely right. It IS $1 million, and we apologize!

As an auditor of numerous non-profit organizations, I was intrigued by this article as a possible way to help my clients keep their audit fees to the lowest possible amount. I found the article to be less than helpful however, because the only thing being discussed is how NOT to have an audit. 99% of my clients are only having an audit because they are required by the State charities board. Not having an audit when one is required is not advisable. Something I did not find in your article however (whic is the singlemost issue that I find causes the most significant amounts of additional / unanticipated time on the auditor's part - thus increasing the fee) is to BE PREPARED for your audit. Prepare your bank rec's on a timely basis. Reconcile your net assets and investments. Prepare a rollforward of your fixed assets. Properly summarize asset additions and disposals. Prepare as much of the auditor's schedules and workpapers as possible (making sure they tie-out and are correct). That is how you can decrease your audit fee when an audit is required.

Thank you for this! I have worked for a non-profit for two years and have observed that our level of preparation directly affects the time it takes the auditor's work. We have tried to have really good communication with them, but unfortunately there's a huge knowledge barrier that results in our questions and their guidance being "lost in translation." Your list of things to prepare is like Greek to me (and I assume to many others in my position). Most nonprofit workers wear many hats and accountant is just one of them so we don't have that much expertise in this area. It would be really helpful if auditors could help provide training or resources that really clearly help nonprofits to prepare for the audit.

I think the initial article *and* your comment are very helpful. Building on the initial reply to your comment, would you consider drafting a follow-up article, providing a list of ways to be prepared, in plain (non-CPA) English? I'm willing to wager that the Blue Avocado folks would love to post it!

Be aware that there are additional audit requirements related to your retirement program. They have just gone into effect this year. If you have 100 or more eligible participants (generally speaking, there are some transition rules if your size fluctuates), and offer an retirement program, whether 403(b) or 401(k), you must obtain an audit of your plan in order to complete your Form 5500 filing accurately. This audit will cost between $6-10,000, in all likelihood....more if you have multiple vendors for your 403(b) program Many 403(b) plan sponsors are not adequately informed on the requirements. Check with your local CPA firms or www.AICPA.com. And, yes, this a continued employment for CPAs piece of legislation.

The non profit I work for has never had an audit, but more and more our grant funders are asking for one. Our operating budget is about $30K and not grant funded ( I am the only employee and I work 10 hrs a week), but we are the fiscal agent for coalitions on key issues like transportation and water so our total budget is about $170K mostly in grants for the coalitions. I despair of ever doing the audit.

I have been the sole accountant at a nonprofit with a budget of $500k since 2002. Due to our funding sources, we are required to have an audit, not a review or anything less than a full audit.

I have managed to contain our audit costs and even cut audit costs by being well prepared. Our auditor gives us a list of information they will need (grant contracts, bank statements, list of employees, credit card statements, etc.) and I make sure it is all ready when they arrive for the audit. I also spend considerable time making sure our Quickbooks file is as correct as possible, which reduces the number of correcting entries necessary. These efforts have saved us about 10% in audit fees.

If your annual grants are less then 500,000 do you have to have an audit in New York? What is the typical charge for an audit? We are a small non profit private foundation so we do not get government grants and try to make it to year end budget wise.

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