If you’re a nonprofit financial manger, there’s a good chance that you’re preparing for your year-end procedures, assuming that June is the end of your fiscal year. Even if June isn’t your year-end, it’s never too early to start thinking about how you can become prepared.

What’s involved in preparing for your internal year-end closing? Depending on the size of your nonprofit, you’ll have several responsibilities. First and foremost, you’ll need to prepare for your audit.

Why Perform an Audit?
While nonprofit organizations are not bound to the Sarbanes-Oxley Act, they can still benefit from best practices inspired by it. Many nonprofit boards are taking the initiative to become accountable and transparent by performing an audit, just as public companies do.

In fact, the state of California (which has long served as a trailblazer for legislation at the state level) requires that all nonprofits with revenues of more than $2 million conduct independent audits. This is a good indication of what is to come.

What Is an Audit?
Simply put, the purpose of an audit is to test the accuracy and completeness of the information presented in an organization’s financial statements. In addition to determining your financial accountability, there are many other benefits to performing an audit:

• You’ll learn whether or not your financial practices are in accordance with generally accepted accounting principles.
• You’ll get information that can be used as a budgeting and planning tool for years to come.
• The reports you prepare for your audit can also be used to satisfy your granting agencies, lenders, and suppliers.
• You’ll help prevent loss through theft and prevent an honest employee from making a mistake that could potentially ruin his or her life.
• You can use an audit as a good public relations tool to show your organization’s commitment to financial integrity.

If your nonprofit organization can afford to hire a professional accountant to perform your audit, it should certainly do so.

Hiring an Auditor:
There is a lot to consider when hiring an auditor, including experience with nonprofit organizations, experience in your area of work, training, and references. Hiring an auditor who has experience in the nonprofit sector is beneficial in many ways, especially because there are major differences between for-profit and nonprofit accounting. It’s also beneficial if the auditor is familiar with your area of work, since many nonprofits are funded differently. In addition to training and experience, look for indications, especially from other clients, that the auditor has the expertise, flexibility, and communication skills that will make for a good working relationship.

Preparing for Your Audit:
After your organization finds an auditor, you’ll need to have everything prepared in advance so that the auditor can start right away, which will save you time and money. Many auditors will provide you with a list of records they will need to examine, plus the due dates for those materials. Your auditor may also provide a list of forms you’ll need to complete and questions you should be prepared to answer. If your auditor does not give you this information, ask for it ahead of time. Preparation will help the process go much more smoothly.

Although this is not a complete list, it will guide you toward what will likely be required:

1. To determine internal controls, your auditor will likely interview your staff members. The auditor will ask questions about procedures involving spending and receiving money, and recording financial information.
2. Confirmations: Your auditor will probably ask to see letters of confirmation on your letterhead that were written to funders, banks, attorneys, and people or organizations that owe you money or those to whom you owe money. These letters confirm the amounts in your books.
3. Have documentation of your assets, liabilities, revenue, and expenses ready.
4. Your auditor may want to see board minutes, leases and other contractual obligations, bank statements and reconciliations, checkbooks, cancelled checks, your chart of accounts, journals and ledgers, and the budget for the year.

After the auditor has reviewed the items listed above, you will be provided with a report of the findings. It is not the duty of the auditor to guarantee that all of your financial transactions have been recorded properly; auditors are only expected to give an opinion about whether or not your financial statements give a fair representation of your organization’s financial standings.

For those who work for a small or mid-sized nonprofit, hiring a professional auditor is sometimes out of the question. If this is the case for you, your organization should form an audit committee to perform the tasks listed above.

Volunteers for the audit committee should be selected from the board or general membership. Preferably, these committee members should have a familiarity with the financial operations at the organization and a general understanding of how audits work. Lacking this, they should have an interest and curiosity in becoming financially accountable.

In short, the audit committee for a small nonprofit should:

1. Determine the adequacy of internal control: Make sure your organization has internal checks and balances in place; test your financial procedures to see if they are being used. Review your board minutes and make sure they match your financial statements. Make sure that more than one person is collecting funds, dispersing funds, recording minutes, signing checks, and preparing financial reports. Doing so will help tremendously in preventing your chances for fraud.
2. Determine the accuracy of your financial reports and records: Review your income and expense statements, balance sheet, and statement of changes in financial position.
3. Make sure all of your activities and procedures are being carried out with proper authorization: Review your corporate charter and bylaws, and make sure documented procedures are being followed. The board minutes will be the best asset to determine this.
4. Determine the physical existence of assets: Verify account balances. Review deeds, tax assessments, and appraisals of items owned.
5. Review your status: Review your tax-exempt status and any activities that could endanger it.
6. File your financial reports: Ensure that payroll taxes, sales taxes, licenses, and other taxes and reports are filed in a timely manner. Organizations with less than $25,000 in annual revenue don’t have to file form 990.