Financial Reporting Options for Nonprofits
As a fiscal year end approaches, those charged with governance (often the finance or audit committee) meet to choose the financial reporting compliance services for the organization.
What are the choices and what should go into this decision?
Before we describe the options, here are a few key reminders. The ultimate responsibility for the accuracy, completeness, and presentation of the financial statements lies with the organization. The organization adopts accounting policies that govern how transactions are recorded, and it establishes processes and procedures to ensure those policies are being consistently followed.
An organization can engage a CPA firm to perform a compilation, review, or audit of its financial statements. A financial statement audit can include a compliance audit or a single audit.
The amount of testing the CPA firm performs — and thus the level of reliance a board or outside users can place on the final report — depends on which service the organization chooses.
A compilation report provides the lowest level of assurance. The accountant obtains the organization’s books and records and creates a set of financial statements in accordance with the organization’s basis of accounting. The accountant does not test the accuracy and completeness of the information provided.
A review report provides a slightly higher level of assurance. The accountant utilizes inquiry and analytical procedures to provide limited assurance that the financial statements are not materially misstated, in accordance with the organization’s basis of accounting.
An audit is the highest level of assurance a CPA firm provides. The firm designs and performs tests to determine if the financial statements are presented fairly in all material respects, in accordance with the organization’s basis of accounting. In addition to an audit of the financial statements, an organization may require a compliance audit or a single audit. A compliance audit is typically required if the organization entered into a grant agreement or contract for which the funder requires an audit to test compliance with the terms of the agreement. Compliance audits often must be performed in accordance with Government Auditing Standards (the Yellow Book). An audit under Yellow Book standards requires the audit firm to design and perform tests of the organization’s internal controls. A single audit is an audit in accordance with the Uniform Guidance and is required when an organization receives direct or indirect federal funding within a fiscal year that exceeds $750,000.
How should those charged with governance decide what services to engage with their CPA firm?
There are many factors to consider, such as regulatory requirements, governance requirements, current and future funding sources, as well as the size and oversight of the organization’s accounting department.
Regulatory Requirements
Management should review all grant agreements to determine the reporting requirements. The grant agreement should define if financial statements are required to be remitted and if so, what kind and at what frequency.
Organizations that solicit contributions within a state are often required to register as a nonprofit in that state. Annual charitable registrations often require a financial statement to be remitted. The level is typically determined by the amount of contributions raised from that state.
If the organization has term debt or a line of credit, the lender may require a certain level of financial statement to be remitted on an annual basis.
Governance Requirements
Those charged with governance should consult the organization’s bylaws organization to determine if a certain level of financial statement is required.
Current and Future Funding Sources
Those charged with governance should talk with management about the current funding sources and the criteria to apply for those funds. If the organization is heavily funded by foundation grants that require an audit report to be submitted, choosing to not perform an audit in any year could be detrimental to this revenue source. In the same vein, if the organization worked to increase its grant funding but needed an audited financial statement, it should consider an audit to become eligible for these funds.
The above are common factors to consider when making this decision. Other factors include internal staffing and size; management oversight; and the cost of the requested services.
In summary, on an annual basis those charged with governance (often a finance or audit committee) should evaluate the users and uses of the organization’s financial statements to determine the most appropriate service for which to engage their external CPA firm.
