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Sinning: Rethinking audit requirements for small nonprofits

LaDonna Sinning - The Journal Record

Jun 7, 2023

As audit firms vie for talent amid declining accounting staff availability and rising costs overall, fulfilling audit requirements has become a significant burden for small nonprofits.

As audit firms vie for talent amid declining accounting staff availability and rising costs overall, fulfilling audit requirements has become a significant burden for small nonprofits. While audits are undoubtably crucial for financial accountability, the current requirements imposed on small nonprofits to access grants place an undue strain on these organizations and often effectively prohibit competition for grants and, therefore, the opportunity for smaller or newer organizations to bring services to the public.

Small nonprofits operate with limited resources and struggle to meet the audit requirements imposed on them to apply for even small grants, which are often little more than the cost of an audit. The cost of hiring external auditors to comply with generally accepted auditing standards and the cost to develop financial statements that meet generally accepted accounting principles typically exceed $25,000 regardless of the size of the organization because of the documentation requirements to meet those standards with an appropriate concern for quality. Consequently, these nonprofits find themselves allocating a significant portion of their limited funds to meet the audit requirements instead of directly supporting their programs and initiatives.

Granting organizations should consider alternative requirements for nonprofits with revenues below a threshold to permit these smaller not-for-profit companies to compete for grant dollars currently only available to the larger service providers. Agreed-upon procedures engagements, for example, could be required to address high-risk areas such as general and administrative expenses, fundraising expenses and pay to executives.

Alternatively, review engagements could be required to ensure financial statements are presented appropriately and consistently and to provide limited assurance as a middle ground.

With regards to the financial statements themselves, grantors should consider permitting a small organization to provide their financial statements under the modified cash basis of accounting. These financials would ensure cash received and expended are recorded. The granting organization could consider requiring that long-term debt and capital assets be included or otherwise disclosed or other modifications, as appropriate.

Current financial statement and audit requirements place undue pressure on small organizations, hampering their ability to grow and fulfill their mission. Addressing these requirements by exploring alternative procedures focusing on high-risk areas or implementing a review requirement and permitting modified cash basis financial statements would strike a balance between financial transparency and operational efficiency. These alternatives provide a practical means for small nonprofits to meet their accountability obligations while allowing them to allocate their limited resources more effectively.

As we continue to support the invaluable work done by all nonprofits, it is essential that we reevaluate the audit and financial statement requirements and adopt more flexible approaches to foster sustainability and long-term success in the sector. Increased grant access by small nonprofits would serve Oklahoma well, driving innovation, efficiency and a broader array of services.

LaDonna Sinning, CPA, CFE, is a partner at Arledge, the largest locally owned accounting firm in the Oklahoma City metropolitan area. Arledge is a recognized leader in the accounting industry offering practical solutions in the areas of tax planning, auditing, consulting, accounting advisory services and client accounting.

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