Tips for improving the quality of your nonprofit’s audit

Audit quality is one of the most discussed topics in the accounting and auditing profession. Audit quality involves both qualitative and quantitative elements, some of which are not easily measurable. It is subjective and viewed differently by different stakeholders based on their expectations and perceptions. It’s important for all the involved stakeholders to align their expectations in order to produce a quality audit. 

Auditing is a watchdog function, however a financial statement audit is not designed or intended to provide absolute assurance. It provides reasonable assurance. This fact can result in a difference in expectations by various stakeholders. It is the difference between what the public and financial statement users believe auditors are responsible for and what auditors themselves believe their responsibilities to be. In order to bridge this “expectation gap,” everyone involved must be informed and educated about the auditing process. The expectation gap can cause different stakeholders to define and measure audit quality differently. An auditor may feel he or she performed a high-quality audit, while the audit committee or management staff may feel otherwise. 

Auditors advise about appropriate accounting principles and how to apply them, and they assist in the preparation of financial statements. While the primary responsibility for conducting quality audits rests with the auditors, the board’s audit committee and management staff at the nonprofit must understand that ultimate responsibility for the presentation of financial statements and the accuracy of the reporting rests with the management of the organization. In addition, management is also responsible for establishing and maintaining internal controls, designing and implementing programs and establishing controls to prevent and detect fraud. 

Third-party regulators also have a role to play in helping to ensure audit quality.

The Public Company Accounting Oversight Board, overseer of public company audits, issued a concept release in July 2015 identifying 28 Audit Quality Indicators in three major areas titled: Audit Professionals, Audit Process and Audit Results. The indicators state that auditors must be knowledgeable, skilled, and demonstrate appropriate values and ethics. There should also be sufficient time allocated to perform the audit work.

The American Institute of Certified Public Accountants issued a six-point plan in May of 2015 to improve audit quality. The plan includes improving accounting education from the high school level upward, improving current auditing standards and ethics requirements, providing resources and support for auditors through workshops and trainings, improving the quality of peer reviews, conducting long-term monitoring of audit firms and strictly enforcing the code of professional conduct. As an auditor for some of the largest and most complex nonprofit organizations, I see a constant focus on improvements. AICPA is doing an excellent job with promoting resources and setting standards to improve audit quality. 

So what can nonprofit organizations do to improve the audit quality at their organizations? 

Audit Oversight Function: The Nonprofit Revitalization Act of 2013 enacted in New York highlighted the importance of having an appropriate audit oversight function at your nonprofit. Many organizations have complied with the law by designating individuals or board committees to perform audit oversight functions. Nonprofit organizations with smaller boards generally have the whole board assume responsibility for conducting audit oversight while those with larger boards tend to designate an audit committee to carry out the oversight function. 

Nonprofits should consider having a separate audit charter or section within their bylaws that identifies the duties and responsibilities of an audit committee and ensures all members of the audit committee are independent and no conflicts of interest exist. Audit committee members must also have enough technical expertise to carry out their responsibilities objectively. They must be accountable for evaluating the quality of the audit on a continuous basis. Having a true accounting/finance professional on the audit committee could add tremendous value.

One of the areas of focus lately is how often a nonprofit organization should change its auditor. There are differing views on this subject. Rotating the audit firm or partner can result in loss of good institutional knowledge that is much needed in the financial reporting environment but it does help mitigate the “familiarity risk.” Some of my clients have taken a different approach that has proven to be very effective: rotating the audit manager or auditor in charge of the fieldwork. Currently there’s no mandated requirement to rotate audit firms or partners for nonprofit organizations. 

Appropriate Communication Between Stakeholders: Engaging the audit committee is important for a quality audit. At a minimum the auditors should meet with the nonprofit’s audit committee twice during the audit process – before the commencement of the audit and after the completion of the audit. Pre-audit communication should define the nature, scope and timing of the audit and initiate open communication between the auditors and the audit committee. Post-audit meetings should discuss the audit results. Audit committees’ desire information on the qualitative aspects of an audit, a report from Center for Audit Quality shows. This can be achieved through open dialogue between the auditors and the audit committee.

With audits under more scrutiny within the nonprofit sector, it is important to ensure that everyone is clear about expectations, that oversight functions for the auditing process are in place and communication between all stakeholders is open and transparent. These steps will help your organization produce a quality audit in partnership with a quality auditor. Remember, auditors work for the audit committee and they work with your nonprofit’s management staff.

About the author: Sibi Thomas, CPA, CFE, CGMA is a partner at the Nonprofit and Government Group at Marks Paneth LLP. Sibi focuses on audit, tax and advisory services to some of the largest and complex nonprofit organizations in New York. Sibi is also an adjunct faculty at New York University. He can be reached at sthomas@markspaneth.com. Twitter: SibiThomas_.