Nonprofits, Choose Your Auditors Well
As a nonprofit finance leader, I have led organizations through the audit process more than 30 times over the years. The many audit principals, managers, and staff that I have encountered have been, for the most part, great partners in establishing public trust in the financial practices and reporting of the nonprofits where I worked. I have turned to my auditors for guidance around new financial standards and pronouncements, asked for help navigating accounting entries I had not encountered before, and sought insight into best practices in internal controls and risk management. Having been through so many audits and with such a variety of organizations, I am more than ever convinced that choosing the right auditors is one of the most important decisions a nonprofit and its financial leaders must make.
Nonprofit auditors as trusted resources
My fondness for auditors has its roots in chance and circumstance. In fact, I owe my career as a nonprofit finance leader to the sudden resignation of a workmate and the sound advice of a patient auditor. I was ten years into my work in the nonprofit sector, when the staff accountant at the organization where I was working unexpectedly resigned. With such short notice, our executive director asked if I could cover the basic accounting needs in the interim until we hired. The immediate need created an opportunity for me, even though I had no previous accounting training. If not for the gentle, persistent guidance of a wonderful audit principal (since retired) at a well-respected accounting firm (since acquired), I would have floundered in a role for which I was not prepared. Instead, the steady support of my first auditor bolstered me as I learned on the job. In a very short time, her encouragement convinced me that the finance role was a great fit. As I continued to learn, her example inspired me to pursue a career as a nonprofit accountant.
Because my first experience with auditors was so positive, I have always looked on my auditors as trusted colleagues who I hire to share in the same basic mission – strengthening the financial function of the nonprofit for which I worked (their client). I am well aware that auditors must maintain their independence in order to offer the public assurance about the financial reporting of the entities they audit. Auditors must avoid being closely involved in generating or preparing the reports that are at the heart of nonprofit financial statements. At the same time, auditors can legitimately provide useful information about finance practices, risk management, strategy, and operations that do not impair their independence.
Experience matters at the audit firm level
With so many audits behind me, I have learned a few things about what makes a good match between an audit firm and a nonprofit. There are certainly general principles at play that make any auditor more effective. One of my most important lessons is that experience matters.
Nonprofits vary widely by size, sub-industry, field of service, business model, and organizational structure. It makes sense that audit firms have varying degrees of experience serving particular kinds of nonprofits. For nonprofits, the key is to choose an audit firm that has deep experience auditing other organizations with similar characteristics. Arts organizations have business model challenges related to paying artists, ticket sales, and corporate sponsorship that show up in their financials. Membership organizations have particular ways of recognizing membership dues based on services provided and the timing of the fiscal year that will affect how they display financials. Community development organizations may have significant funding from government sources that require special accounting treatment and may even warrant single audit procedures.
You can check the experience level of potential audit firms by asking for a list of current clients and referrals that match your organization’s profile. Knowing that your organization is not unique in a prospective firm’s portfolio is very important. Being the one-off, anomalous client within a firm’s larger audit practice could become a serious disadvantage. You may also ask to know which professional and industry associations your auditors are a part of, which national association conferences they attend, and whether any of the audit firm’s staff sit on advisory panels to any of those associations. Check, too, whether the firms you are considering contribute to thought leadership in your organization’s field or the broader field of financial management that supports organizations of your type.
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When choosing auditors, include these questions in your Request for Proposal (RFP): |
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Experience matters at the audit staff level
Experience matters at the level of individual audit team members, too. Audit teams that have experienced field managers and engagement principals tend to navigate the nuances between assurance and compliance more fluidly. Inexperienced audit teams are more likely to focus heavily on the technical aspects of accounting guidance, poring over FASB standards with an eye to compliance rather than remaining focused on their larger goal of providing assurance. FASB pronouncements do not claim to offer definitive examples on every accounting situation that could arise. The standards FASB issues are guidelines to help articulate common accounting principles. They are not regulations. Their purpose is to bring some comparability to statements across similar organizations and some assurance to financial statement users that the information presented is representative of each organization’s true financial position. Experienced auditors know the difference between a principle and a rule, which allows their deep technical knowledge to benefit your organization at an even higher level.
Your auditors are long-term partners, so choose wisely
The expense of an audit and the time it takes to develop a productive relationship with your auditors are good reasons to consider the choice of an auditor thoroughly. Remember that you are hiring your auditors to do more than just help you comply with a set of accounting requirements. Good auditors will likely become a trusted resource to you from year to year as your nonprofit moves through its annual financial cycle. It is entirely appropriate and strategically savvy to use your audit request-for-proposal process to establish which audit firm can provide you value beyond the basic audit function. Your organization’s financial health is key to your long-term mission success. You will do best to have a strong auditor as an ally supporting you and your nonprofit along the way.
Curtis Klotz is a CPA serving as director of nonprofit innovation at CLA. His writing is inspired by his work in CLA’s nonprofit consulting and business operations practice and more than 30 years of industry experience. Before joining CLA, Curtis was vice president of finance and CFO at Propel Nonprofits, where he was a frequent online contributor to Nonprofit Quarterly and other blogs. He was named Minneapolis/St. Paul Business Journal’s Nonprofit CFO of the Year in 2017, and is past chairperson of the Montana Nonprofit Association. Curtis graduated summa cum laude from St. Olaf College with majors in women’s studies and religion.
Thanks Curtis, this is so educative. Nice read.