With the recent hike in the audit and review threshold for charitable contributions for Maryland nonprofits, many organizations may be asking themselves – if we aren’t required to have an audit or review anymore, do we really need to continue our current level of assurance?
The Maryland threshold increase, which took effect on October 1, 2016, was made in order to better align with federal Uniform Guidance standards and upped the threshold for charitable contributions from $500K to $750K for audits. The charitable contribution threshold for reviews was also raised from $200K to $300K.
This change may mean your organization no longer falls within the regulated threshold for either an audit or a review. Given the expense associated with these assurance services, nonprofits who now fall outside the threshold may be celebrating the cost-savings of cutting their annual audit or review.
I’ve worked with enough nonprofits over the years to know how tight budgets can get and how the first services and programs to get cut are those deemed “unnecessary.” However, the fact of the matter is, you won’t really know how necessary or unnecessary your assurance services are until you consider the implications of operating without them.
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To start, it’s important to understand the key difference between an audit, a review and a compilation, which comes down to the degree of assurance an auditor is able to place on their report regarding your organization’s financial statements.
- An audit provides the highest level of assurance, as an auditor places an opinion on the set of financial statements, which states whether the financial statements are free from material misstatements.
- A review is a lower level of assurance than an audit, as the opinion from the reviewer states they are not aware of any material modifications that should be made to the set of financial statements.
- A compilation offers no assurance, as it is simply a set of financial statements prepared by an accountant, with no assurance on the numbers on the statements.
Four Instances When You’ll Want an Audit or Review
1. When You Need a Second Set of Eyes
In all honestly, all businesses, and especially nonprofits, should always have a third party looking at the activities that will be presented in their organization’s financial statements. Many nonprofits don’t have a full-time accounting team or their finances may be handled by someone without an accounting background.
In these cases, having a third party come in for a review or audit can ensure your organization is free of or less likely to have mistakes on your books, which will:
- Save you headaches in the short- and long-term
- Help you to identify financial opportunities you may have otherwise missed
2. When You Need to Present Your Financial Information to Decision Makers
The financial statements prepared in an audit or review will allow you to present financial information in a clean and accurate statement that management and your board (speaking of which, did you know we have a webinar on how to build a better board for your nonprofit?) can use to make well informed decisions about your nonprofit.
3. When You Want to Attract New Funding Sources
Some donors may request to review your assured financial statements before making a contribution, and without an annual review or audit, you won’t be able to fill their request. It’s also safe to assume that grantors are going to want a history of assured statements that have been prepared as part of your organization’s annual audit or review.
4. When You Want to Ensure Your Tax Forms Are Accurate
Having financial statements with some level of assurance will aid in the preparation of IRS Federal Form 990. This tax form is available to the public (i.e., current and future donors) via sites like GuideStar, and can be used when a donor is evaluating the sustainability of your organization. Prepared financial statements from a review or audit can help eliminate and prevent any errors in the numbers that are presented on your organization’s tax documents.
How to Decide Whether to Keep or Cut Your Current Level of Assurance
When deciding whether or not to continue with your current level of assurance, meet with your management team, board of directors and CPA to discuss which level assurance makes the most sense for your organization, considering not only the needs of today but also the needs of the future.
If you no longer meet the threshold for an audit or review but your organization expects your contributions to exceed the threshold in the next year, consider proceeding at the higher level of assurance in order to keep your statements comparative with the level of assurances necessary.
Need Help?
In the end, don’t make any rash decisions when it comes to your organization’s audit or review services, even if it seems like it will save you a hefty chunk of change. Talk to a third party advisor, like a member of our Nonprofit Group, who has the expertise and knowledge to guide you. If you have any questions or would like to discuss your organization’s situation, contact us online or call us at 800.899.4623.