Practical tips for a smooth nonprofit audit (even when it’s over Zoom!)
So what is an audit, exactly?
An audit is an independent examination of the accounting records of an organization – either for profit or nonprofit. In an audit, an independent professional accounting firm with no vested interest in the organization being audited checks all of the organization’s financial transactions and statements to determine whether that organization’s financial statements are accurate, truthful and complete – and prepared according to a set of accounting rules.
If the auditors determine that an organization’s financials statements are in order, they give the organization an “unqualified opinion” or clean audit. This demonstrates to shareholders and investors (for publicly traded companies) or funders (for nonprofits) that the organization is spending money how they said they would.
Do all nonprofits need to perform audits?
Not necessarily. Private foundations, smaller nonprofits, and community-based organizations that aren’t registered as 501(c)3s don’t always need them, though some states such as California require Private Foundations to have audits. This article offers a nice overview of when audits are required for nonprofits. However, we encourage you to check the requirements in your location, as they can differ from state to state.
What did NFF’s audit look like in 2020?
Up to fairly recently, auditors would always come to an organization’s office in person. Today, technology makes it easier for them to do much of their work online. Starting in 2017, our auditors transitioned from three people coming to our office for two weeks straight to two people coming in every other day.
While we had already been transitioning to an audit that was partially in person and part virtual, the pandemic made a fully virtual audit a necessity. In-person visits were no more; instead, we would meet with our auditors pretty much daily over Zoom, communicate daily over email to confirm which documents they needed at that time, and send digital copies over a secure portal where they could be verified and reviewed.
What helped make NFF’s virtual audit successful?
Preparation, preparation, preparation! First, several years ago, we gradually digitized most of our financial documents and in 2020 we moved them to the Cloud. In addition to making the transition to a virtual audit smooth, this also meant that we had a reliable and accessible backup for key financial documents. Second, around the same time in 2020, we transitioned payment processing for ACH, eliminating the need to process paper checks. Since we no longer had paper copies of financial transactions, auditors no longer needed to come into our office to hunt down receipts or cancelled checks.
Lastly, we have a fantastic team – one that’s used to responding to challenges on a quick timeline. In 2020, we saw both our loans receivable and loans payable double due to a huge increase in our business. While this definitely kept us busy, we were able to plan for this increase in advance and manage the greater volume of transactions without doubling the amount of hours we worked. Hats off to our finance team!
What advice would you offer to community-centered nonprofits seeking to streamline the process and receive a clean audit?
Three tips: strong internal controls, disciplined accounting, and accurate record keeping. If your finance team can master these, you’ll be well-prepared for any audit – even a surprise virtual one. However, we recognize that many small nonprofits do not have a full finance team, which can make audits challenging and pull staff away from other work.
In these cases, we recommend exploring working with a firm that outsources back-office functions like financial planning, accounting, and human resources. While they are not a fit for everyone, they can free up valuable staff time for the essential programs that smaller, community-centered nonprofits deliver.
Wow, that was a lot. Can you summarize that for me?
Of course! Here’s what you need to know when you’re getting ready to audit your organization’s financial statements:
An audit is an independent review of your organization’s financial transactions and records, and the accounting.
It’s intended to prove to your supporters (and the government) that you are using your money ethically and legally.
An audit is no longer the month-long, all-hands-on-deck event that it used to be; if 2020 taught us anything, it is that much of an audit can be done virtually.
That said, it is still a lot of work for your financial team! Prepare for your audit by building a culture of strong internal controls, disciplined accounting, and accurate record-keeping.
If you don’t have a dedicated financial team, consider outsourcing finance and accounting functions to an external firm so that your staff can focus on delivering programs.
Want more accessible insights to help build your organization’s financial health? Check out our cash flow projection template, guide to budgeting basics for nonprofits, or any of the other nonprofit financial fundamentals on our website. And don’t hesitate to ask NFF any questions you might have!