Program Officers Blog

Foundation program officers are asked many questions about certified independent financial audits by organizations preparing a grant proposal. In fact, it's a topic that generates a lot of anxiety during the application process. To help alleviate those concerns, we've collected a few of the more common questions and our responses to them to help put us all on the same page.

What is a certified independent financial audit?

This is basically a third party opinion stating that the financial statements are fairly presented and that they are in accordance with rules of the accounting profession, referred to as GAAP or generally accepted accounting principles.

Am I required by law to have one?

No, but you may have a government contract or be subject to an administrative rule that requires you to have an audit. If you are considering competing for a government contract, check to see if an annual audit is required as you may be increasing your organization’s costs.

Am I required to have audited statements to receive an MMT responsive grant?

No. Applicants invited to submit a Responsive Grant full proposal are asked to provide current year financial statements (balance sheet and income statement) and financial statements for the three prior years (audited statements, if available). While we do not require an organization to provide audited financial statements, we would generally expect to see an audit for organizations with annual budgets of $500,000 or above.

Am I required to have audited statements to receive an MMT PRI?

No, but having audited statements is a factor when we conduct due diligence on a PRI application. Independent audited statements provide MMT with assurance that an organization's finances are presented fairly in all material respects. Should we request a full proposal from your organization, we will request current year financial statements (balance sheet and income statement) and financial statements for the three prior years. For prior years' statements, audited statements are preferred, if available. For audited statements, we will request a copy of the management letter, your responses to the management letter and adusting journal entries (AJEs) for the most recently completed fiscal year.

Does my organization’s 990 tax return serve the same purposes as an audit?

No. While the 990 provides more information than an audit, it does not have a certified public accountant’s (CPA) sign-off attesting to the accuracy of the statements. (Note: Some 990s are prepared based on audited statements. If we request a copy of your historic financials, tell us that it is based on your audit.)

Do professional organizations promoting nonprofit best practices have standards for when an organization should obtain an audit?

Some establish guidelines, but the annual revenue threshold for receiving an audit varies considerably among groups. Others are silent and recommend an audit in a manner appropriate for the organization’s size. If you are seeking accreditation, accrediting agencies may require audits.

When should I obtain an audit?

It depends. Has your organization grown? Do you have government contracts? Are you considering a loan? Are you handling significant amounts of cash? Does your size prevent you from full segregation of financial duties?  Do you suspect fraud? Are you contemplating a capital campaign and want donors/potential donors to have confidence in your fiscal accountability? These are just some of the questions we recommend you consider.

Audits are expensive. Is there any way I can reduce the cost?

Possibly. Seek quotes. Assume more responsibility for schedules (i.e. accounts and pledges receivable, depreciation, investments, etc.) and preparation of certain notes. While these (and other) actions may reduce the cost of an audit, the savings may be nominal and likely be offset by the additional work on your part. Have a frank discussion with your auditor about ways to minimize the cost of an audit.

Are there alternatives to audits?

Yes. There are financial reviews and agreed upon procedures engagement. While these have the benefits of a third party review and cost less than an audit, they provide less assurance of the accuracy of an organization’s financial statements.

What are auditors required to communicate?

For a concise and easy-to-read checklist of what an audit accomplishes check out this pdf prepared by the Seattle accounting firm Clark Nuber. The document is an excerpt from an audit presentation the firm did for the board of Philanthropy Northwest.

How can I make my organization’s audit more “user friendly?”

We review a variety of audits. The ones we find most useful possess the following core characteristics:

• there are comparative statements for the prior year
• there are references to notes within the financial statements
• the notes are in the same order as financial statement accounts
• the same terms are used consistently in the accounts and notes
• the audits mirror an organization’s interim statements.

Audits can be very intimidating, even for the experienced professional. The best way to break down this barrier is to ask questions of the auditor. Remember, the audit is your document!

Audits should help tell the story of your organization’s work. You have considerable flexibility to tailor the statements to meet the needs of your users – donors, industry peers, regulatory agencies, general public, board, staff and others. Taking this approach will result in the audit being a valuable and friendlier management, communications and development tool.

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