Good financial health is essential to your nonprofit’s ability to grow and make a difference in the community. In addition to developing sound procedures for planning, reporting, and managing your organization’s finances, one of the best ways to boost accountability and sustainability at your nonprofit is to conduct financial audits.

Although the IRS occasionally audits nonprofits as they do individuals and businesses, most nonprofits conduct financial audits through an independent auditing firm. After reviewing your organization’s financial records and reports, these external auditors will provide unbiased, expert recommendations to capitalize on your strengths and improve upon any weaknesses in your strategy.

The audit process can be confusing at first, but fortunately, you’ve come to the right place! In this guide, we’ll discuss three things you should know before conducting an independent financial audit at your nonprofit, including:

  1. When Nonprofit Audits Are Required
  2. Benefits of Financial Audits
  3. The Audit Process & Timeline

A quick note of clarification: Nonprofits can undergo many types of audits, such as technology, compliance, and human resources audits. However, for the purposes of this article, we’ll use the term “nonprofit audit” to refer only to independent financial audits. That being said, let’s dive in!

1. When Nonprofit Audits Are Required

The first question most nonprofit professionals have about financial auditing is, “Does my organization have to undergo audits?” In short, it depends.

As Jitasa’s guide to nonprofit financial audits explains, there are four situations in which your nonprofit would be required to conduct an audit for compliance purposes:A numbered list of the four reasons why some nonprofits are required to conduct audits, which are discussed below.

  • Audits are written into your organization’s bylaws. When your nonprofit was established, the founders may have specified that the organization would need to conduct regular audits to lay a foundation for financial accountability.
  • You receive more than $750,000 in federal funding annually. This includes federal funding passed through state and local governments.
  • State laws require your nonprofit to undergo an audit. Most states have established an annual funding threshold for nonprofits (often $500,000), and if your organization exceeds that threshold, you have to conduct an independent audit.
  • You’re applying for a grant that requests an audit. According to Learn Grant Writing, grantmakers often ask nonprofits to attach financial documentation to their grant applications to demonstrate a history of effective financial and grant management. While some funders might require you to submit budgets, annual reports, or past tax returns, others may specifically request an audit report.

However, just because your nonprofit isn’t required to conduct an audit doesn’t mean you’re off the hook! You still might consider auditing your organization’s finances—whether formally or informally—to experience the other benefits that these procedures can offer.

2. Benefits of Financial Audits

Whether your organization’s financial audits are mandatory or optional, going through the process provides several advantages to your nonprofit, including:

  • Regular accountability. By undergoing an audit every year or every few years, your organization will find it easier to maintain the same high standards for financial reporting and comply with legal requirements for nonprofits over time.
  • Clear opportunities for improvement. Especially if it’s your first time conducting an audit, your report may not be perfect—and that is okay! The auditor’s recommendations will likely provide you with a roadmap for using your funding to further your mission more effectively.
  • Increased transparency. If you communicate to donors that your organization has undergone an audit and that you’re making improvements based on it, they’ll know that you take financial management seriously and feel more confident that you’ll use their contributions wisely.
  • Potential reputation boost. Charity watchdogs like Guidestar, Charity Navigator, and the Better Business Bureau sometimes rank organizations higher if they conduct audits since it demonstrates that the nonprofit is trustworthy.

While you can experience some of these benefits by informally auditing your organization’s finances yourself, it’s more effective to work with an external auditor. Not only will you have an official audit report to submit for compliance and back up your reputation, but you’ll also get a more objective perspective of your nonprofit’s financial situation. You’ll need to put in extra effort to prepare beforehand and apply the auditor’s recommendations afterward, but the benefits of an external financial audit will likely outweigh the costs.

3. The Audit Process & Timeline

Nonprofit financial audits typically take between two and five months to complete, depending on the complexity of your organization’s situation and the availability of an auditor that aligns with your needs and budget. If you’re required to submit your results to a government agency or grantmaker, plan to complete the audit well before their requested date. If not, try to conduct it several months before your Form 990 filing deadline so you can report the changes you’re making as a result.

Here is a breakdown of the basic steps of the auditing process and the estimated time you’ll need to complete each one:

  • Selecting an auditor: 4-12 weeks. Start your search by looking up nonprofit auditing firms online and asking for recommendations from other organizations in your area. If you’ve worked with a nonprofit accounting firm, they usually won’t perform the audit themselves to avoid a conflict of interest, but they may be able to suggest auditors based on their knowledge of the sector.
  • Preparing for the audit: 2-4 weeks. After you choose an auditor, they’ll typically send you a Provided by Client (PBC) list that includes all of the documentation they’ll need access to during the audit, such as bank statements, investment records, and details of grants received. In addition to pulling these documents, you should also thoroughly review your financial records and address any outstanding issues before the audit.
  • Conduct the audit: 2-4 weeks. Once the auditor begins their work, there is very little for your organization to do besides wait for the results to come back.
  • Incorporate audit recommendations: ASAP post-audit. The sooner you can jump into making improvements after you get your audit report back, the better! Make sure to share the results with your accounting team, since they’ll be your best resource during the implementation process and for ensuring the audit leads to better long-term financial management.

The recommendations in your audit report could range from simply establishing a few new internal controls to completely overhauling your spending and revenue generation strategies. No matter where your nonprofit falls on this spectrum, don’t be afraid to put in the time and effort to make the necessary changes and ensure your audit was worthwhile.

Although the term “audit” sounds scary to many people, your nonprofit can approach financial audits with confidence rather than concern now that you know what to expect. Treat these experiences as learning opportunities, and remember that even if your report doesn’t come back flawless, your auditor has your organization’s best interests in mind throughout the process.