Audits are expensive in terms of money, staff time, and board attention. CPA Dennis Walsh tells us how to wring the most value from them:
An IRS tax audit has been described as an autopsy without the benefit of death. The financial statement audit — done by an independent CPA, not the IRS — can be seen by nonprofits as only slightly more appealing.
Many nonprofits have annual CPA audits, but the executive director and/or the board’s finance or audit committee may be unsure whether they are getting the most out of the audit. A worthwhile question for the board to ask might be: “Are we getting the most out of this significant investment of money and time?”
We have developed two questionnaires to help you answer this question. The first looks at whether your auditor is doing a good job for you. The second questionnaire looks at whether your nonprofit is doing its part in utilizing the audit. (The questionnaires can also be downloaded as a Word document; see link at end of article.)
But first, why have an audit, anyway?
Benefits of a good audit relationship
An unqualified audit opinion — a “clean audit” — is a statement by the auditor that the financial statements are a fair and accurate representation of your organization’s financial situation. As Jeanne Bell of CompassPoint Nonprofit Services pointed out in a Blue Avocado article, an audit can have the following major benefits:
Enhances donor and community confidence
Demonstrates commitment to fiscal accountability
Moves the nonprofit toward best financial practices (through auditor feedback)
Encourages accounting discipline
Provides limited deterrent to fraud
The better the relationship with your audit firm, as expressed by the following indicators of a good audit relationship, the more of these benefits you can expect to realize:
These two questionnaires are tools to help you sample for the presence of these qualities. It is not a checklist for a clean audit report or intended to assign blame for shortcomings, but rather looks for qualities inherent in a well-functioning audit relationship.
It’s important that you be willing to invest some time finding out what’s at the core of any “no” answers.
Reluctance to change auditors
Whatever their past audit experience, however, organizations are often reluctant to tamper with what feels like a successful service relationship. After all, if it isn’t broken, why fix it?
A common attitude among small organizations in particular is that although we get written up for accounting deficiencies, we still receive an unqualified audit opinion from year to year. But an unqualified opinion along with what seems like a good relationship with the auditors doesn’t guarantee that the organization is getting what it is paying for in the audit experience.
Assessing your answers
The greater the number of “no” answers, the more the board should address audit matters with priority. Consult with your CPA audit principal to determine underlying reasons for “no” answers and develop an action plan to remedy the issues, with consideration to any contributing factors from the organization as well as what the audit firm can do to help spur you on to better practices.
Identifying causes of perceived complacency in the audit relationship can be much thornier. Since the audit depends on a cooperative partnership among the board, staff, and audit team, there is usually some degree of shared responsibility where expectations aren’t met. Here in particular, board and management must resist the temptation to point fingers and remember that the board, not the audit firm, is ultimately responsible for the quality of the audit relationship.
Bear in mind that recurring deficiencies due to structural issues such as unwillingness to invest in accounting systems, training, or staffing, for example, will take more time and resources to remedy than adjusting the timing of audit field work to lessen disruptions to your activities.
Tip: If your organization’s staff struggle to prepare GAAP financial statements prior to the audit, consider having the statements initially prepared (compilation engagement) by a second CPA firm at a lower, non-audit billing rate. This can also enhance audit firm independence, reduce overall cost, and help avoid the common management letter comment regarding inadequate accounting personnel.
If you decide that issues with the current audit firm can’t be worked out, then it’s time to look for a successor. But be careful, deliberative, and if you must, part with your current auditors gracefully. (And watch for an upcoming Blue Avocado article on finding a new auditor.)
Although some nonprofits dread the annual audit as something to be endured, the audit is an exercise in good governance and accountability. In practical terms, this means that the financial statements are judged to portray the organization’s financial condition fairly and completely. And valuable management advice is a natural by-product of a good audit relationship. You consume considerable resources being accountable to your stakeholders: get the most from it.
[To download a free copy of this article in Word to make it easy for you to adapt the questionnaire to your own organization, click here.]
Thanks to Dane Byers, CPA, of Bassett & Associates, PA, in Raleigh, NC, and Steve Zimmerman, CPA, of Spectrum Nonprofit Services in Milwaukee, WI, for their feedback in the development of this article.
Dennis Walsh, CPA, volunteers his post-retirement time helping North Carolina nonprofits with accounting concerns, work for which he recently received the Community Service Award from the Guilford Nonprofit Consortium. He shares his expertise nationally with nonprofits through Blue Avocado. Through the Deborah and Dennis Walsh Foundation, he has also published “Legal & Tax Issues for North Carolina Nonprofits” and Man From Macedonia, a memoir by civil rights leader Aaron Johnson. To right you can see him discussing an audit of Civil War expenses with Mr. Lincoln.
See also in Blue Avocado: