Episode 133: Audits, Reviews, Compilations: When Is a Nonprofit Required to Have an Independent Audit?
Financial statements help Funders determine a nonprofit's funding readiness. Independent Audits by Certified Public Accountants are what Funders use to get a clear picture of a nonprofit's financial situation. Audits can be costly. But also audits are for organizations at certain budget levels. Check out this episode to learn when you need an audit, and how to circumvent an audit so that you can still apply for a grant requesting one.
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🔦 NONPROFIT SPOTLIGHT 🙌🏿
Mary Katherine Matalon Pt. 1
👉🏿https://www.linkedin.com/in/mary-katherine-matalon
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🚀 RESOURCES TO HELP YOU RUN A SUCCESSFUL NONPROFIT
The Nonprofit Checklist
https://fusion.amberwynn.net/product/the-nonprofit-compliance-checklist/
How To Demonstrate Impact
https://fusion.amberwynn.net/product/how-to-demonstrate-measurable-impact/
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Podcast Transcript
Speaker 1 (00:00):
Welcome to On Air with Amber Wynn, where nonprofit leaders learn to fuse passion and commitment with proven business strategies to create long-term funding impact and sustainability. And now here's your host and resident, Philanthrepreneur, Amber Wynn.
Speaker 2 (00:24):
Hey, it's your girl, Amber Wynn, Philanthrepreneur, and today we're going to cover audits, reviews, and compilations. Listen, your nonprofit is a business and you have to follow the rules by the authorized agencies that govern your organization. So when we come back, we're going to jump into when is a nonprofit required to have an independent audit? A nonprofit is a business governed by agencies on the local, state, and federal levels authorized to revoke a nonprofits tax exempt status for noncompliance. Don't put your funding in jeopardy. Get the nonprofit compliance checklist to make sure you don't forget to file required forms to the agencies that can derail your operations for months. Compliance is 50% of a nonprofit's funding strategy. Getting the grant is half the work, but keeping it and getting it renewed is the other half. Don't spend hours writing grants only to have them rejected because your tax exempt status has been revoked.
(01:24):
Keep your organization active and in good standing. Order your copy today. Welcome back to On Air with Amber Wynn, and today we're talking about audits, reviews, and compilations and when it's required of you to do an independent audit. So this is usually how it goes. You are applying for a grant and the funder says that you need two years of audited financials. Well, let's talk a little bit about why they're asking for that information. Generally speaking, if a funder's asking you for an audited financial, your budget is somewhere around 500,000 or a million upwards of that arena, they're asking for audited financials because what an audit does is it checks the accuracy of your internal controls, right? A CPA certified public accountant is going to go through all of your financials and make sure that you are running your business like a business. If an organization, if a funder is going to give you $500,000, they want to make sure that your internal controls are in place.
(02:33):
They want to make sure that you're using an accounting system whereby if they ask you for an accounting of their money at any time in the granting period, you'll be able to do that. So if you have QuickBooks, if you have Wave Apps and they say, Hey, how much money have you spent already? You can go click, click, click with a button and say, well, so far we've spent this amount on this and we have receipts, or we still have this amount on this budget line item, and this is how much we have outstanding. A funder is responsible either to taxpayers or to the government or to the board, or to their investors. So they're not going to just hand over six figure grants without knowing that you can manage your money. So an audit says that to them. It says, all right, well, I have internal controls in place, and the only people who can determine that are certified public accountants.
(03:32):
So when you're going through an audit, there are certain things that they're looking for and it's not something that you can put together when an independent, it has to be an independent certified public accountant does the audit. They put their certification on the line, so it's going to be someone who doesn't know you, who doesn't work with you, and they're actually saying, I am putting my certification on the line to say that this organization is or is not up to standard. So generally speaking, it's the government who's going to ask you for an independent audit, but a lot of foundations, if they give over $500,000, they're going to ask you for an independent audit. At the end of the audit, the CPA is going to issue a report. It's a letter that they staple on top of your financial statements, and they state whether or not in the auditor's professional judgment, your accounting records and year end financial statements fairly represent your nonprofit's financial position according to the generally accepted accounting principles.
(04:42):
This is really important. If they say that your organization is raggedy, let's just keep it real, then it's highly likely then that the funder won't fund you. So these audits are extremely important when you hit a certain level. Now, I've had nonprofits say, I can't apply for this organization because we don't have any audits. Audits can run you between five to $10,000. They're not cheap. They're not cheap because the auditor, the CPA, they're going through records. So that takes a lot of time. So you're paying for their hourly rate. So if you get to the position where you want to submit for funding and they're requiring an independent audit and your budget is under 500,000, then you can ask them, Hey, listen, our budget doesn't exceed this amount. Is it okay if we provide you with another method? And there are other methods that you can use to satisfy an organization's requirement to make sure you have internal controls.
(05:48):
The two other things that you can ask if you can provide one is called a review or a mini audit. It examines your financial records, but the CPA does not express an opinion as to whether or not your financial statements are in accordance with the GAAP. What it does say is that they've reviewed your records, and that costs about half as much as an audit. And generally speaking, if your budget is under $500,000, a funder will accept that. You just have to ask, right? They put it on their guidelines and people say, well, I don't qualify. Ask the question. The third thing you can ask for is a compilation, and it is the cheapest alternative to an audit. The accountant assembles your financial statements from the information that you provide, but they don't really audit or review, and therefore they can't express an opinion. But the funder gets to see that an accountant has gone through your records and they're presented in a way that aligns with the GAAP.
(06:54):
So what am I saying? I'm saying ask the question. In California, you are required to have an independent audit if your budget is 2 million or more, but it varies by state, right? For the government, the Office of Management and Budget, OMB, they require any nonprofit that spends over $500,000 or more in federal funds in a year to get an audit. Some of them require 750,000. So you've got to ask the question, but the bottom line, and why I'm sharing this with you is because you need to know that you don't automatically get disqualified if you can't present an independent audit. You need to ask your funder. You need to say, Hey, our budget is under $250,000. Is it okay if we provide you with a compilation or is it okay if we provide you with the review? So don't just say, oh, we can't do it because there's no, we don't have an audit.
(08:03):
The other thing I want you to look at too, when you're submitting your grant to these organizations, if they say your budget has to be $500,000 or more, or a million or more, that means you don't qualify, right? So I know that a lot of you guys are eager to get those government grants because they're big numbers, but they're big numbers for reasons, right? If they're going to give you $6 million, they want to know that you have the internal controls, and therefore, that's why they're asking for the audit. If your budget is a hundred thousand dollars, you don't qualify for those government grants that are at 6 million, so half a dozen in one, six in the other. But if you do meet the budget requirements and you can't afford an independent audit right now, then ask your funder if it's okay for the alternatives. All right?
(08:54):
So I just don't want you to take yourself out of the game before you even get started. When we come back, we're going to ask Amber, it's my favorite part of the episode where you get to ask me your pressing questions. So when we get back, you get to ask Amber if your grants aren't getting funded. It could be because the funder can't see how your programs are making an impact in your community. Get the How to Demonstrate Impact Workbook to quantify the work you're doing in your community in a way that a funder can see a potential return on your investment. Funders need proof that your organization will use their grant dollars to improve your community. That proof is called impact, and impact is quantified through measurable outcomes. Leverage my 30 years of program development experience to help increase your chance of securing funding.
(09:48):
Order your copy today. Hey guys, we're back. You're on air with Amber Wynn, and today we have a question from Tanika from Alt Loma, and her question is, can a nonprofit write off any of its business expenses? Hey, Tanika, the answer is no. Why? Because a nonprofit is a business and those expenses are a part of your business expenses, right? Nonprofit doesn't mean that you get exempt from everything. That exemption is for the revenue that you generate in support of your organization. So if you get a grant, they're not going to tax you on that because that grant is going to further your mission. If you get a donation, they're not going to tax you on that because that donation is going to further your organization. Likewise, the incentive, that tax exemption that you are able to give your donors, it's to incentivize them to give you money. But the reality is a nonprofit is a business, and so you have business expenses, you got to pay your accountant, you have to pay your rent, you have to pay for marketing, you have to pay for printing. All of that stuff is your responsibility. It's not the funder's responsibility, and you cannot write it off. Good question though. Thanks, Tanika. So now we are going to jump into my favorite time of the episode. I know I just said that about Ask Amber, but I guess I love all my episodes.
(11:31):
This is where I get to put a spotlight on those in the nonprofit sector because you guys are doing the work, right? You're in the community and you're so focused on what you're doing that you're not really doing what you should be doing, which is getting out there, getting the visibility. I want the funders to know that you're there. I want your potential clients to know that you're there. So every week I put a spotlight either on a nonprofit or a consultant who's serving the nonprofit. Why? One is because I want people to know you exist and they get to see the amazing work that you do. And then two, I want to provide resources to the nonprofits out there who may be looking for a consultant. And for the next four episodes, I am going to share with you a conversation that I had with Mary Catherine Madeline, and she's an amazing individual because she comes from the same background that I come from, which is fun development. And so she's going to talk to us a little bit about what she does and how she does it and how she can support you as nonprofit leaders. So let's jump in with our conversation with Mary Catherine Madeline.
Speaker 3 (12:50):
As a fundraising advisor, you really start to form a partnership with your nonprofit. So instead of getting in and potentially making the asks directly, what I'm doing is helping nonprofits expand their capacity to fundraise themselves. So it's more about coaching, mentoring, giving the tools for success so that after your engagement with me, then you have the tools and expertise to do it on your own, so it's less of a band aid and more of a holistic coaching experience.
Speaker 2 (13:43):
Welcome back, you're on air with Amber Wynn, and if you enjoyed just that snippet with Mary Catherine, be sure to go over to YouTube and check out the entire interview. We're going to be talking with her for the next four episodes. We break them up in nice little chunks so that you can see the whole interview. But if you want to see it all right now, go over to YouTube. And as a matter of fact, while you over there, be sure to like and subscribe. And if you found anything valuable in this week's episode, be sure to share it with your community. I want you guys to know that I am trying to grow my YouTube channel, so be sure to subscribe and share. And as I close out, I'm going to tell you what I tell you every week. Take care of yourself, like you take care of your community. See you next week.
Speaker 1 (14:34):
Thanks for listening. If you enjoyed this episode, subscribe and leave a review on iTunes. Head over to www.amberwynn.net/podcast for the links and resources mentioned in today's podcast. See you next time.
