As nonprofit organizations look to cut costs in this difficult economic environment, one question that I've been asked several times is "Do we really need an audit?"

Due to the cost of audits, many organizations are exploring less costly options. One reason people ask me about audits is to get the reaction of a funder. But audits are not just for funders, so I encourage organizations to involve their board members in this discussion. A key function of the audit is to provide board members with an assurance that financial statements are based upon real numbers.

Board responsibility may take on a greater role as the new 990 form comes into use in the next year. Starting next year the 990 asks if a copy of the 990 was provided to members of the organization's governing body before it was filed and to describe that process. These new requirements on the 990 are intended to reinforce the idea that your board members stand behind the financial management of the organization. 

What are the options you have in presenting financial statements? There are three levels of accounting statements: compilation report, review report, and audit report.

While accountants can provide much more detail, let me summarize these reporting levels. One key is that all of these statements are produced by a CPA. A person who is not a CPA can put financial information in a form that looks like a compilation report, a review, or an audit, but they cannot provide the cover letter that attests to both what the statements are (i.e., what level of report) and that they were completed in accord with AICPA standards.

To create a compilation report, a CPA takes the information you provide and puts it in the correct form for your organization. For a nonprofit that means producing a Statement of Financial Position and a Statement of Activities. It may also include a Statement of Functional Expenses.

The CPA takes what you provide at face value when compiling a compilation report.

A review report provides some limited review of the information that you provide.

An audit provides a greater depth of review. There are three things that a CPA does in an audit that are not done for the review:

• The CPA reviews and becomes familiar with the organization's internal financial controls,
• The CPA tests those controls, and
• The CPA confirms the financial data provided by inspection and by seeking external confirmation.

What level of reporting do you need?

Often the first answer to that question is another question; What do funders want? I'm not sure that is the best way to answer the question. But let's start there anyway.

My advice to any organization is to look back at the last few years and see what funders asked for audits, then call those funders and ask their opinions. Also, if you are looking ahead to a major campaign, think about the donors you may be approaching, especially government entities, which may require audits.

On the governance side, there are several issues to consider. I urge you to bring key board members into the discussion because they are (or should be) the main consumer of your audit or other reports.

While the size of budget is an issue, the complexity of a budget is a better measure. For example, do you accept cash payments? Do you rely upon fund raising from individuals that involve a lot of pledges? Do you have several offices? Do you pay costs on behalf of clients? Do you hold money on behalf of clients?

All of these factors add a level of complexity to your financial statements. The more complex your finances, the more you need an audit. Often complexity and size go hand in hand. But there are cases where a rather small budget might be complex. For example, a small organization that is a confidential payee on behalf of clients. If you have even one such account, you need an audit.

Finally, talk with your CPA about your organization's needs and its budget limitations. Your CPA can advise you about ways to save money that are consistent with the controls you need.