Audit & Fund raising – 25 states require compulsory submission of audited statements, if a nonprofit organization (domestic or foreign) solicits funds in that state. Another 13 states require registration for fund raising but do not require submission of audited financial statement.
Audit & Donor comfort – Audit may be considered even if not required by state laws as it supplies the donors, public and other stakeholders with added confidence by providing specific information on how contributions were used by the organization. Many donors ask for an annual audit report when applying for grant. Some donors however do consider that smaller nonprofit organizations may not have audited financial and instead accept funding applications if a copy of FORM 990 is made available.
Some donors may accept Form 990 during the application process but may require a yearly audit after the funds are transferred.
Fiscal Accountability – A nonprofit organization that subjects itself to audit is considered to be more committed to its fiscal accountability in the eyes of the donor.
Preventing fraud through audit- An audit by a qualified CPA bolsters the soundness and fraud robustness of the financial policies of the organization by pin pointing the lacuna in the existing processes.
Review as an alternative to audit – If the board of a nonprofit organization does not want to spend on audits, it may choose to have the financial reviewed rather than getting a full-blown audit. A review involves inspection of only limited documents and a brief communications with staff and/or board. It does not involve actual visits by the auditors and thus does not include auditor’s opinion.
To summarize, a nonprofit organization should get its book audited if –
1) The organization expends $500,000 or more in federal funds.
2) The organization is raising funds in a state that requires annual audit.
3) The organization exceeds the gross revenue or contribution limits of the state where it is located.
4) The organization wishes to apply for funds that requires audit.
5) The organization feels that the cost benefit analysis favors conducting of audits.