Special to the Philanthropy Journal

By Leizl Baker and Austin Robinson

As a land-grant university, NC State is committed to providing students hands-on, highly-engaged learning opportunities AND to providing research that is of direct, practical use to the fields we work in. Philanthropy Journal proudly presents this series of evidence-based resource articles developed by Dr. Amanda J. Stewart‘s masters level Management of Nonprofit Organizations class. These articles represent a perfect overlap of engaged learning and practical research.

Despite this status as a leading accountability method in the nonprofit sector, there are few tasks which inspire as much anxiety and dread as the financial audit. For many nonprofits, regular audits are required by funders or legislation; for others, it is an additional step taken to show stakeholders that the organization is using funds appropriately.^[1] Much of the anxiety is caused by the fear of doing poorly on the financial review. These unpleasant feelings can be mitigated by learning the financial and record keeping skills needed to achieve a clean audit.

There are several helpful resources available through the National Council for Nonprofits and the Virginia Society of Certified Public Accountants which detail how nonprofits can prepare for their audits.^[2] However, these texts are often written from the perspective of professionals working in the nonprofit sector, and they tend to focus on how to set up an audit committee and organize financial records. It is more difficult to find literature written from the perspective of the certified public accountant (CPA) performing the audit, possibly highlighting a deficit in communication and information sharing between auditors and nonprofit personnel. It is vital to cultivate a strong relationship with your auditor(s) to ease the negative aspects of the audit process while also serving to gain a valuable ally in achieving your mission goals.

Diana Hill, a certified CPA and auditor at Rives & Associates, LLP, specializes in auditing and attestation, and has worked with many different types of nonprofits including foundations, churches, and community health centers.^[3] One of her main duties, besides the actual audit, is to establish and maintain good relationships with her clients. Because of her experiences, she is able to offer a unique perspective and recommendations on how to foster and maintain a strong relationship with the auditor.

Communication is important at all levels of nonprofits, both internally among board members and employees, and externally with donors and contractors. The American Institute of CPAs suggests that entities can display good governance by making sure that the auditor has easy access to the audit committee, and that the committee and auditor talk regularly, with a least one meeting annually occurring without the presence of management.^[4] Consistent and clear communication between the auditor and leaders of the organization, allows the auditor to fulfill their duties and formulate appropriate financial recommendations in a timely manner. Nonprofit staff and board members are encouraged to ask questions at all steps of the auditing process as their interest indicates to the auditor that they are invested in the outcome and welcome advice. Open dialogue allows for a better flow of communication and gives the opportunity for a closer relationship to be formed.

According to Ms. Hill, when a board is particularly involved and asks her questions, she has a more positive outlook on the result of the audit. These communications show her that the board members take their governance duties seriously and genuinely care about the well-being of the nonprofit. While the board members should maintain a level of separation from the inner workings of the organization, it is important for them to exercise their duties of care, loyalty, and obedience by staying informed about the finances and compliance of the organization. They are ultimately responsible for the internal controls of the nonprofit and cannot perform their duties properly if they are not actively involved.^[5]

It is also important that the organization’s staff and board members utilize open communication channels among themselves during the auditing process to prevent any misunderstandings or setbacks. It can be tempting to hide, or downplay poor financial performance, but this practice can be incredibly damaging to the nonprofit’s future. In order to form and maintain the appropriate goals and strategies to meet the organization’s mission, information needs to be communicated amongst all parts of the organization. If limited information is given instead, the organization may not be able to set up the proper controls necessary to ensure success.

One way that Rives & Associates, LLP encourages their clients to share financial information internally is through their “no surprise mandate.” This means that the auditors inform the nonprofit staff of their findings and then give them the opportunity to communicate those findings to the board before the auditors make the official presentation. This process helps to establish respect and trust between the staff, auditor, and board. Be sure to check with your auditor at the beginning of the process to learn how, and when the findings will be communicated, and your role in dispersing that information to other parts of the organization.

Auditing is always a stressful time for nonprofit employees and board members, but if you strive for an open, communicative relationship with your CPA, you just might find a lasting ally dedicated to ensuring your organization’s mission is achieved.

^[1] “State Law Nonprofit Requirements,” National Council of Nonprofits, accessed June 6, 2017; “Why a Nonprofit Might Conduct an Audit Even When the Law Doesn’t Require It,” accessed June 12, 2017.

^[2] For more information see: “Managing an Audit: A Step-By-Step Approach” accessed June 12, 2017; Virginia Society of Certified Public Accountants, Audit Guide for Audit Committees of Small Nonprofit Organizations, Glen Allen, VA:  Virginia Society of Certified Public Accountants, 2011. PDF e-book. 

^[3] Diana Hill (CPA), interview by Austin Robinson and Leizl Baker, June 5, 2017.

^[4] “AU Section 380: The Auditor’s Communication with Those Charged with Governance,” American Institute of CPAs, accessed June 14, 2017.

^[5] Bowman, Woods. “Tools and Techniques of Nonprofit Financial Management.” In The Jossey-Bass Handbook of Nonprofit Leadership and Management, edited by David O. Renz and Robert D. Herman. (Hoboken, New Jersey: John Wiley and Sons, Inc., 2016), 587-588.

Leizl Baker is a graduate from North Carolina State University pursuing her Masters degree in accounting. She has an interest in nonprofits and governmental audits and has interned in the field with Rives & Associates, LLP.

Austin Robinson is a Master’s candidate in Public History at North Carolina State University.