The Advisability of Annual Financial Audits

Most likely, when your accountant has suggested you conduct a financial audit, your first reaction is dread. Just the word “audit” evokes images of government agents with red pencils combing through your books to find costly mistakes. You hesitate. Technically, as a nonprofit organization, you’re not required by federal law to have a financial audit. Plus, an audit is an additional expense that you hadn’t budgeted. You trust your bookkeeping team. Your books are in good shape. So why should you conduct an audit?

Financial audits are independent examinations of records to validate compliance with generally accepted accounting principles. Audits are conducted by licensed certified public accountants who are not affiliated with the organization. Often, audits help improve accounting procedures and eliminate inefficiencies. Occasionally, they reveal mismanagement or fraud.

The following are some commonly asked questions about conducting financial audits:

1. If the law does not require my association to conduct an audit, why should I have one? Simply put, it’s a best practice. The purpose of an independent audit is to ensure the organization is complying with generally accepted accounting principles. While associations may not be required by federal law to perform audits, some states and funding sources require them. Additionally, an independent audit or review presents documented checks and balances that can protect the organization, its officers and its members in the future.

The most compelling reason to conduct an audit is that a nonprofit has a fiduciary responsibility to its board of directors and its members. Conducting an independent analysis of your financial statements and records assures the board that the accounting team has done an accurate and effective job. It also gives peace of mind and validation that everything is on track and that the organization’s internal controls are working properly. With this information, the board can report back to membership that its financial management is fiscally sound.

2. How often should an association conduct an audit? At SmithBucklin, we require most of our client organizations to conduct an audit on an annual basis. In some cases, we recommend an annual review instead of an audit, which is less in scope than an audit but can still provide helpful financial insights. Associations schedule their audit fieldwork to take place after the fiscal year has ended. If team members are not following the appropriate protocols or procedures, an audit can detect those problems and allow the association to quickly remedy the issues. If these issues go unchecked, it could be incredibly costly for an organization down the road.

3. What are auditors looking for? Audits provide an independent eye into how your organization is functioning financially. Prior to an audit, auditors will request a long list of financial documents (bank accounts, transaction lists, event registration lists, etc.). Over the course of a week or two, they will review the documents and look for errors. Auditors will also look for patterns that might suggest something fraudulent is taking place. When the audit is complete, the auditor will issue a report regarding the financial health of the association, offer recommendations on areas to improve, and discuss any concerns, inconsistencies or fraud that has been identified.

4. What if my organization is small? The larger the association, the stronger the need for an annual audit. When a lot of revenue is coming in and expenses are going out, an organization is subject to higher risks of potential errors or fraud. However, smaller organizations with smaller budgets can also greatly benefit from an audit by ensuring their policies and procedures are effective. For a small association, a budget inaccuracy can have a big impact on the group’s finances.

Your executive team should assist with the following: setting up a board committee to select an auditor, providing the auditor with all the requested documents and records, reviewing the auditor’s report with the board and making changes in accordance with the report.

While at times an intimidating process, annual audits can help associations become more effective and efficient with their finances and overall operations. By making the process an annual priority, associations can build trust with their boards and provide assurances to their membership that their finances are in order.