Finding the Right Auditor When Nonprofit Compliance Is Important as Ever

Nonprofit compliance is rarely voluntary

In the nonprofit world, organizations are well aware that there are “strings attached” to many of the resources that support the mission work. Nonprofits enjoy a status exempt from paying taxes — but it comes with …. strings.

One of those strings is meeting annual compliance requirements. Form 990s of some variety for nearly all nonprofits (except those under a religious exemption), and — depending on your location and affiliation to national organizations — many nonprofits are required to have a financial statement audit each year.

This National Council of Nonprofits map is helpful for evaluating state requirements, though funders may also impose audit requirements, even for organizations in states that don’t require them. Always, but particularly in the current environment, the ability for a nonprofit to show that it takes fiscal compliance and oversight seriously, is as important as ever.

The shortage of CPAs has an impact on nonprofits

Based on Form 990 data, of the 135,000 nonprofits with revenues over $1 million in the most recently filed tax year, nearly 88,000 (65%) indicated on the Form 990 that they had an audit. Under generally accepted accounting principles, a financial statement audit must be performed by a qualified CPA.

The number of CPAs in the United States, and the pipeline into the profession (accounting majors in college), have been declining for years, leading to initiatives by many firms (including CLA), state societies of CPAs, and others to rethink the strategies, rules, etc. for the CPA designation.

This “CPA Pipeline Issue” impacts nonprofits in a variety of ways:

• Some nonprofits employ one or more CPAs on their accounting team to lead or support the accounting/finance function, supporting the ability to plan, report, and manage the organizations’ ability to meet missions in a sustainable way.
• An increasing number of nonprofits outsource accounting to CPA firms to join your team, providing ongoing finance and accounting services.
• Nonprofits that require audits need to find CPA firms to provide audit services. The shortage of CPAs, retirements of smaller firm partners, and acquisition of smaller firms by larger firms are all contributing to driving up the cost of an audit or ability for smaller nonprofits to find a firm willing and able to serve them.
• In some cases, the only auditors a nonprofit can find with capacity and an affordable price, don’t have nonprofit-specific experience, and may not be equipped to advise and help the organization.

Rightsizing audits for lower complexity entities

At CLA, we provide assurance services to more than 4,000 nonprofits and Form 990 preparation services to more than 8,000. Within that portfolio, we have clients with $750 million annual budgets and extreme levels of complexity. And we serve a lot of $1 – 2 million nonprofits that are less complex. They don’t receive federal funding, have only a few revenue streams, don’t hold complex investments, and don’t have unrelated business income taxes to navigate. And yet, they are still nonprofits with restricted funding, revenue recognition, in-kind contribution, and other aspects specific to nonprofits.

As we evaluated our practice mix, we found that there were ways we could staff, structure, and project manage smaller audits to increase our efficiency, and affordability for our clients. Knowing the need for smaller nonprofits to find good audit and tax firms at a price they can afford, CLA has designed a model to exclusively serve “lower complexity nonprofits.”

To do this, we are leveraging a few things:

• Coordinated team of individuals who love serving smaller nonprofits, across the United States, working together to focus on providing audit and tax services to this segment of our client base.
• Technology we have been building to use AI and automation to reduce the manual efforts required in the historical audit model.
• Fully remote audits with the option for a local nonprofit leader to oversee the relationship, attend board meetings, and further help our clients.
• Optional cash-to-accrual support as part of the audit process. Many orgs of this size operate on a cash basis but require accrual-basis audits. Bringing the right people to our team to help identify adjusting entries for accruals, deferrals, pledges, and other common non-cash basis items greatly improves efficiencies.

CLA is here to help

Sometimes we get comments from new prospects that “CLA is really big, and probably too big to serve us.” We fundamentally disagree. While we have the skills and experience serving large national organizations — and we will keep doing more of that — we care deeply about our local, community-based organizations and we will continue to innovate so we can serve those organizations, too.

Are you a $1 – 2.5 million organization looking for a qualified, high quality, audit and tax firm that truly understands nonprofits like you? We would love to see if we can help.