Independent Audits for Associations Part 1: Do You Need an Audit?

Independent Audits for Associations Part 1: Do You Need an Audit?

When we hear the word “audit,” most of us think of a financial audit by the IRS. There are, however, many kinds of financial audits that are significant in non-profit association management:

  • Contact Monitoring
  • Internal Review
  • External Management Review
  • IRS Review

In our four-part series Audits for Associations, you’ll learn:

  • When does a non-profit association need to have an audit and what kind?
  • Do independent audits really uncover fraud?
  • How is an independent audit set up?
  • How do I select a qualified auditor for my association?

Should My Association Have an Independent Audit?
The short answer is yes. An annual audit by an independent party is a valuable part of routine part of fiscal oversight. Auditors examine, among other things:

  • Bank reconciliations
  • Selected restricted donations (to see that they were handled and recorded properly), Grant letters (to see that receivables are accurately stated).
  • Physical assets
  • Financial journals
  • Ledgers
  • Board minutes

Following a careful investigation of an association’s financial procedures and records, an auditor issues a formal opinion about the accuracy of the reporting.

When an Independent Audit is Required by Law
An independent audit of an association may be required by law in some circumstances, particularly when it comes to non-profits. As noted by the National Council of Non-Profits, these include:
Federal, state, and local governments may request a copy of the organization’s audited financial statements
Many state laws require that non-profits submit an audited financial statement when they register for charitable solicitation or fundraising purposes.
Non-profits that expend $750,000 or more of Federal funds annually are subject to special audit requirements. (This figure was raised from $500,000 in 2015.)
Banks may require a nonprofit to have an audit as a condition of receiving a loan.
Private foundations may request that a nonprofit submit a copy of the nonprofit’s most recent audited financial statements in conjunction with submitting a grant proposal.
A full list of the State-by-State audit requirements can be found here
Should Your Associations Conduct an Independent Audit?
Not all associations are required by law to conduct an independent audit. Those that are not legally obligated may still need to factor in the requirements of their funding sources. Some of those sources may require an independent audit as a condition of financial participation.
Given the wide variations in requirements, it is wise to seek advice from an accountant or attorney experienced in independent audits for non-profits to determine what is best for an organization.
Benefits of an Independent Audit
Independent audits can be costly, but there inherent benefits to conducting them, even when they are not required.
Confidence – An audit is a symbol of fiscal accountability that inspires confidence in members, donors, and the broader community.
Best Practices – A CPA who is current with changing non-profit accounting standards can advise staff and board members on ways to move the organization towards the best possible financial management practices.
Some Protection Against Wrongdoing – Audits help shore up the strength of internal controls to prevent financial misconduct. It should be noted, however, that an audit is not a tool for uncovering fraud.
Our discussion of internal audits and fraud continues in the second installment of Audits for Non-Profit Associations: Audits Can’t Uncover Fraud