As solicitors of public funds that are supposed to be used to accomplish great things in the community and the world, nonprofits must show they use donated funds for the purposes intended. They also need to show the sources of their funding and what portion goes directly to their mission versus toward administrative or fundraising expenses. Financial audits are one solid way to reassure the public and funding sources that you are financially accountable and responsible.
Nonprofits are not legally bound to conduct audits. But in the interests of transparency and accountability and your ministry’s long-term benefit, your bylaws should mandate them on an annual basis. The Evangelical Council on Financial Accountability (ECFA) requires its members to submit to an annual audit by an independent auditing firm, one that follows generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAPP).
As the ECFA says, “An annual audit is an excellent tool for financial accountability, tracking diverse funding sources and organizational goals. Conducted at the end of the fiscal year by a professional accountant, an audit shows funders that you have effectively managed your funding for the previous year and maintained the ability to track, document, and dispense grant monies. It also allows you to see how organizational funds were spent and if the funds spent correlated with your program goals.”
Grant makers routinely request a copy of your most recent Audited Financial Statement. The annual audit fulfills their request. If you do not have one, funders will want to know why and you will likely hurt your chances of receiving funding.
Different degrees of audits
Audits and financial reviews vary according to cost and thoroughness. There are four basic levels of financial review, including the full audit: Full Audit, Review Audit, Compilation With Disclosures, and Compilation Without Disclosures.
The Full Audit usually begins around $5,000. The cost could be higher depending on the size of your ministry or the complexity of the audit. Here an auditor investigates and examines your ministry’s financial statements to ensure that you have adequate error detection and fraud prevention controls.
Full audits verify (sometimes through statistical sampling) that all monies are due to the nonprofit and payable by it. It also thoroughly evaluates the financial well being of the nonprofit. A full audit generally analyzes ratios and offers advice to management. At the end of audit, the audit firm states that it believes “the data presented is fairly stated in accordance with generally accepted accounting principles.”
A Review Audit begins around $2,500. This report is much like a full audit except the audit firm does not investigate or examine the nonprofit. Instead your nonprofit simply responds “to questions for all necessary data.” A review includes a disclaimer indicating that it was up to the nonprofit to provide the necessary information. A review does not analyze business ratios nor does it include a full report to management.
The Compilation With Disclosure starts out at $1,000. The report resembles a review but here the nonprofit provides data and responds to auditor questions. Ratio analysis and a management report are not used in a compilation. A disclaimer indicates that the audit firm examined no data and that it depended on management to supply all information.
The Compilation Without Disclosure begins at $500. It offers roughly the same level of review as an accounting or bookkeeping service would. It includes no investigation, no footnotes, and the nonprofit provides all of the data.
Whatever kind of audit you need, your ministry should find an audit firm that is skilled in nonprofit auditing, up-to-date on accounting standards, and familiar with your area of the nonprofit Christian ministry. It should also provide hands-on support and have an outstanding track record.
Jeffrey J. Rodman is the founder, President, and CEO of Here-4-You Christian Grant Consulting and Church Grant Writing providing consultation for grant writing and funding development nationally and internationally. Mr. Rodman has a Master Degree in Education, is a Certified Fund Raising Executive (CFRE), and is a Certified Grants Specialist (CGS). He is an experienced grant writer, nonprofit executive, and public speaker. Mr. Rodman has written hundreds of proposal to both government and private sources, has secured millions as a consultant, and has an 80% success rate in securing grants.