Why a nonprofit might conduct an audit even when the law doesn’t require it

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Even if the state or federal legal requirements for audits do not apply to a particular charitable nonprofit, there are a number of reasons why a charitable nonprofit may decide to conduct an independent audit. One primary reason is to demonstrate the charitable organization’s commitment to financial transparency. Publishing an independent audit report on a nonprofit's website or providing the report to those who request it are examples of transparent practices that donors and the public have come to expect from charitable nonprofits. Potential donors may want assurance that the charitable nonprofit’s financial practices meet accepted standards. (As an example: one of those standards is whether or not the charitable nonprofit follows appropriate procedures to handle contributions consistent with a donor's intent.)

Another reason to conduct an audit even when not required by law is that many public and private foundations/funders (including governments) require charitable nonprofits to submit audited financial statements or conduct an audit in order to be eligible for funding. A number of charity watchdogs -- such as CharityWatch, and Charity Navigator take into consideration whether a charitable organization has an annual independent audit when rating charitable nonprofits (regardless of whether an independent audit is legally required for that organization). And quite simply, conducting an independent audit is good practice (although cost benefit analysis should be made). To exercise their due diligence, your own board of directors may want the assurance offered by an independent audit that the financial statements are free of material misstatements. 

The National Council of Nonprofits encourages every charitable nonprofit to make a decision with guidance from professionals, such as an accountant who is familiar with your nonprofit's finances and funding sources, and your state’s legal requirements for independent audits.

A nonprofit can build its reputation for integrity, transparency, and professionalism, by having a regular independent audit conducted and making it available to stakeholders and the public. To demonstrate a commitment to transparency and accountability, the National Council of Nonprofits posts its annual audited financial statements on its website, in addition to posting all the other documents that charitable nonprofits are required to be made available to the public upon request. (Read about the “public disclosure” requirement for charitable nonprofits). 

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The case for NOT conducting an independent audit

As noted by the Nonprofit Assistance Fund, most foundations do not want to require a small nonprofit to spend $5,000 or more for an audit just to apply for a grant (in some cases, the cost of the audit would actually exceed the amount of the grant!) What donors really want – and need – is reliable information about the nonprofit’s financial health. While an audit is the ideal way to provide a snapshot of financial status along with assurances from a CPA about the reliability of financial statements, it is important to keep in mind that there are many ways to demonstrate financial accountability. (Elsewhere on this website the Council of Nonprofits offers examples of practices that promote a culture of accountability and transparency.)

Nonprofits challenged by limited resources need to examine each budget item carefully to identify potential cost savings. Audits can represent a significant expense. Even for a small organization (under $1 million in annual revenues) it would not be unusual for an audit to cost thousands of dollars just in professional fees (not counting staff time preparing for the audit and working with the auditors). For organizations with annual revenue exceeding $1 million, the cost is generally $10,000-$20,000. Because audits can be so costly, nonprofits that are not required to have an audit but still want to demonstrate financial transparency, may wish to explore more affordable alternatives such as a review or a compilation.

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