Every nonprofit leader knows that their organization is subject to a number of regulatory compliance requirements. In many cases, this includes the need for the organization’s financial statements to undergo an audit, often on an annual basis. 

Checking off all the compliance-related boxes required by the local, state, or federal government is obviously important for any nonprofit organization. This part of running a nonprofit accounting department does not typically generate the same feel-good emotions that come along with fulfilling the nonprofit’s mission and serving the greater good, but it is a necessary part of the nonprofit accounting process that all nonprofit leaders must successfully complete.

The financial audit process is one area of compliance that many nonprofit leaders would concede is not exactly their favorite. An audit opens the organization’s financial records up for the very purpose of intense scrutiny. Despite leadership’s best intentions of getting everything right when it comes to financial records, we are all, after all, human and mistakes in accounting happen. Having every statement and account reviewed with a fine tooth comb can be stressful to say the least. 

That’s why nonprofit accounting departments are often flabbergasted to hear their CPA or accountant suggest that they have an independent audit performed outside of any required regulatory compliance. Why would a leader put themselves through that unless they absolutely have to? Isn’t the annual compliance audit enough?

At Lumix CPA we do, in fact, make this recommendation to our nonprofit clients and after they hear our reasons why we think this process is beneficial, they often agree and engage us to perform an independent audit on their behalf. 

Before we get into the reasons why a nonprofit would have an independent audit performed, let’s get into what exactly an independent audit is and what the purpose is of conducting one. 

What is an Independent Audit?

An independent audit is a process by which the financial records, accounts, financial transactions, accounting practices and systems, and internal controls of  nonprofit accounting are examined closely by an independent auditor. 

Being independent refers to the fact that the auditor is a third-party and not an employee of the nonprofit. The nonprofit retains the services of the auditor through a contract for services. Industry standard is to have the nonprofit’s financial records examined by a licensed certified public accountant (CPA), like those that make up the team at Lumix.  

The process is thorough and involves the auditor taking a deep dive into the nonprofit’s financial records and sometimes, their systems and processes related to accounting. The independent auditor will review all of the organization’s financial statements with an eye to determining if the records adhere to “generally accepted accounting principles” (GAAP). 

GAAP are accounting principles that are created by the Financial Accounting Standards Board. These are not legally established but are recognized standards that reports can be measured and weighed against in a formalized way. Throughout the process, any deviations from GAAP must be noted in the final report.

3 Ways a Nonprofit Benefits from an Independent Audit

1. To Demonstrate Financial Transparency

In the nonprofit world, we hear and talk a lot about financial transparency. The bottom line here is that nonprofits face scrutiny, fairly or unfairly. Voluntarily opening your books, without any requirement to do so, is a very powerful statement to the public, donors, and the board that your organization is 100% committed to financial transparency. You are inviting them in, on your own accord to dig around, take a look, and see that everything is clear, clean, and under control when it comes to your financial statements. That is powerful. 

2. It Can Make it Easier to Get Funding

Many foundations that fund nonprofit organizations, both in the public and private sectors, require independent audits from potential recipients of their funding. And those that don’t strictly require it may look more favorably on a nonprofit accounting department that has taken the initiative to have their statements independently audited. That’s because oftentimes watchdog groups will rate a nonprofit higher if they take this step on their own. A higher rating and better reviews from these overseers makes it easier for your nonprofit to secure the funding you need to achieve your mission and goals.

3. It Creates Confidence Going into Compliance-Mandated Audits

The whole point of a financial audit is to reveal any mistakes or reporting problems within your nonprofit’s accounting records. Once revealed, you can take steps to correct mistakes and put systems in place to avoid those mistakes moving forward. In this way, having an independent audit can prepare your organization for a regulatory audit. You can go into your compliance audit confidently, secure with the knowledge that you’ve already ensured your financial statements are accurate and that your systems are set up for success. 

At first glance, nonprofit leaders sometimes shudder at the thought of engaging a CPA to conduct an independent audit. With guidance from a qualified professional, however, they usually see that there is far more to gain than to lose through the process. 

If you are interested in creating clarity and confidence in your nonprofit’s financial records through an independent audit, the CPAs at Lumix can help. Contact us today to learn more.