Does Your Nonprofit Need an Audit?
Nonprofit audits provide independent verification that an organization's financial statements are accurate and its resources are properly managed. While audits require an investment of funds and staff time, they build trust and credibility with donors, funders, partners, and other stakeholders critical for success. For most nonprofits, reaching a certain size or receiving grants that mandate audits triggers the need for independent financial reviews.
Other signs that it’s time for a nonprofit to conduct an annual audit include:
Your annual budget reaches $500,000 or more. At this level of financial activity, leadership and stakeholders need third-party assurance that resources are adequately protected and used as intended for impact. Standards for nonprofit governance and donor trust call for audited financial statements at mid-range budgets and above.
Public support makes up a substantial portion of your funding. Nonprofits receiving half or more of their revenue from donations should conduct audits to verify contributions are utilized for the purposes and programs promised to donors. Transparency builds donor confidence and lifetime value.
You receive government grants or contracts. Most government agencies require audited financial statements to monitor how awarded funds are spent and ensure compliance with guidelines. To receive and maintain government funding, audits are typically mandatory for nonprofits at any budget level.
Your organization or its activities are complex. Nonprofits with multiple revenue streams, subsidiaries, international operations, or other sophisticated structures need audited financials to adequately manage risks and provide an accurate big-picture view of their finances. As organizations grow in scale and complexity, audits become essential for financial integrity and oversight.
Your board or major funders require audited financials. To meet governance standards or funder demands, some nonprofits must conduct independent audits whether their budgets and structural complexity warrant them or not. If key stakeholders prioritize or expect audited statements, it is important to meet these expectations despite the additional costs required. Satisfying board and funder requests leads to greater trust and support long term.
Once you’ve determined the need for an audit, you should aim to conduct them annually or biannually at a minimum. Annual audits provide the most up-to-date and comprehensive view of finances for informed decision-making and maximum transparency. They also help identify any issues early and enable you to take timely corrective action.
Biannual audits may suffice for smaller nonprofits on stable financial footing, but budgets, revenue streams, and operations should be closely monitored in between reviews. Government funders especially typically expect annual audits for any grants or contracts awarded. If costs are a concern, shop auditing firms for the best value or ask major donors to fund accounting oversight and transparency as an investment in your organization's stability.
In summary, both legal requirements and voluntary standards call for regular nonprofit audits at a certain stage of organizational size and complexity. Annual independent reviews of financial statements and controls are expected for mid-level budgets and above, government-funded programs, complex organizations, and by most boards and funders. Inviting increased financial oversight demonstrates integrity, builds trust, and provides insights for greater impact over the long term, which is well worth the investment required for a strong audit. By properly managing resources and reporting on your stewardship of funds, your donors and other constituents will gain assurance in your nonprofit's mission and continue their partnership for years to come.
