Having your financial statements reviewed or audited builds trust with donors and supporters. It shows you’re managing your funds with appropriate financial oversight. Reviewing the financials also reduces risk and encourages your board to make decisions around how to manage the funds.
To decide if an audit or a financial review is right for your small nonprofit, you first need to understand the difference.
Audits vs. Financial Reviews
The purpose of an audit is for a third party to decide if your organization’s financial records are reliable and accurate. Audits provide a “high level of assurance.” They require the auditor to gather all financial information, talk to third parties like grantors, and test organization processes.
Nonprofit audits help identify risk, errors in accounting, and weak internal controls. The auditor will communicate any issues to you, usually in writing. This helps an organization correct problems before they hurt the organization. Once issues are corrected, the auditor will issue a revised evaluation showing the improvement.
During a financial review, an independent party compares current and past financial statements. They’ll check for inconsistencies and ensure documents use generally accepted accounting principles, or GAAP.
Financial reviews are less comprehensive than audits, but can be an ideal alternative for small nonprofits. They provide “limited assurance” that the statements and financial practices are reliable.
The CPA will look at some of the documents and ask questions to identify any risk or areas of concern. Internal processes are not checked during a financial review, but potential issues are noted if they're found during the process.
What Is a Financial Compilation for a Small Nonprofit?
A simpler option is a financial compilation. A financial compilation is when an accountant organizes your records into a simple accounting format. This helps nonprofit organizations review and share financial information with their board members or financial institutions.
The CPA does not review the records for accuracy or any type of risk, but it makes sure the records are organized to help the organization identify any errors or missing information.
This is a great option for small nonprofits that are new to financial reviews and audits and may not have a team member who knows how to create financial reports.
How Do I Know Whether an Audit or a Financial Review Is Right for My Nonprofit?
Now that you’re more familiar with the options, you may be wondering which is better—an audit or a financial review.
First, you need to understand what type of requirements your banks, grantors, or other funders may require. Even if the IRS isn’t knocking at your door, many grants, especially government grants, will ask for audited financial statements.
A financial review is not as thorough as an audit. The reviewer won’t give a formal opinion on how well the organization is managing its finances, but the organization can benefit by engaging in the process—you’ll have an opportunity to identify any weak points in your accounting and make improvements before ever needing a formal audit.
Financial reviews work well for organizations that have under $1M in revenue because they cost only half as much as an audit. They can help get the organization’s financial statements in order before an audit may be required.
If you can’t afford—and aren’t required—to have an audit and still don’t feel ready for a full financial review, a financial compilation is a great place to start.
Invest in the Long-Term Health of Your Small Nonprofit
When nothing is required, it can be easy to put it all off until next year—but you never know when you’ll need those financial statements in a pinch. You’d hate to miss out on a great grant opportunity because your financials are too much of a spiderweb to make sense of in time to apply!
Taking the time to undergo regular assessment of your finances and financial processes is an investment of resources into the longevity of your organization.