Jayme F. Moore, CPA
Vice President & Director

When it comes to CPA services relative to your nonprofit organization’s financial statements, do you know what you’re getting for your money? Or what you’re missing? With the recent change in Massachusetts state requirements, increasing the threshold at which nonprofits are required to obtain annual independent audits and reviews, many organizations should re-evaluate their needs after understanding the differences between the levels of service they may now receive. 

Audit, review or compilation

The options available to a nonprofit are an audit, a review or a compilation. Most financial executives and nonprofit leaders have heard the words, but it’s important to understand the differences.

Moreover, when it comes to deciding which level of service you need, are you making the decision or is someone else, such as the nonprofit’s board or a bank?

The basic differences among the three levels of service are the amount of work the CPA performs, the financial statement comfort level to your organization, and the cost. But there are also value-added differences and various benefits to consider.

Performance differences

• Compilation: A compilation is the most basic level of service. A CPA assists management in presenting an organization’s financial information in the form of financial statements, without providing assurance that there are no material modifications that need to be made to them. Basically, the CPA takes your numbers and assembles them in a financial statement format. Not very comforting.
• Review: The next step up is a review, for which the CPA performs analytical procedures and makes inquiries of management and others within the organization. Analytical procedures include looking at expected relationships among the components of a financial statement and other financial ratios and comparisons. Based on the limited procedures performed in a review and limited assurance, the CPA firms report states that we are “not aware of any material modifications that should be made to the financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.” More comfort.
• Audit: The highest level of service is an audit, for which the CPA is required to obtain an understanding of the company’s internal controls. The CPA may or may not decide to test adherence with those controls. The CPA also will assess the risk that any fraud has occurred that would materially affect the financial statements. Furthermore, the CPA is required to corroborate, on a test basis, amounts and disclosures made in financial statements by obtaining evidence through inquiries, physical inspection, observations, confirmation with outside third parties, examination of records and documents, as well as analytical and other procedures. The CPA is required to perform sufficient procedures to support an opinion as to whether the financial statements are “presented fairly, in all material respects in conformity with accounting principles generally accepted in the United States of America.”
  The audit is much more thorough and comforting, both for you and your board. In addition to satisfying regulatory or bank requirements, organizations also should consider any expectations that potential grant funders or donors may have when deciding about the level of service.

The price of comfort

The biggest differences among the three levels of services are the resulting comfort levels and the professional fees involved. The intensive time commitment of an audit naturally means a higher professional fee. Beyond the level of analysis that each type of service entails are the important advisory benefits provided by each of these services.

Advisory benefits

With a compilation, the value added is minimal. You simply get a financial statement prepared using your numbers. If you are confident in your bookkeeping and your board or lender simply wants a professionally prepared financial statement, this may suffice.

In a review, because of the analyses and inquiries made, your CPA becomes more knowledgeable about your organization, your financial position and your operations. A good CPA will not only use it to draft financial statements, but will use this knowledge to better advise you on operations and other matters.

With an audit, the benefits are greater. The analyses and inquiries that are made in a review are also made in an audit, but an audit goes a lot deeper. The analysis of your financial records and controls contributes to a more thorough knowledge of your organization and its operations. Although auditors are not engaged to give an opinion or critique of your system of internal controls, their understanding of systems or procedures that could use improvement, if any, is reported in a letter to management. Additionally, they are required to report any significant deficiencies or material weaknesses in your controls.

Overall, while audits provide the highest level of assurance, financial reviews offer a more cost-effective option for nonprofits that need credible financial statements but do not have the budget for an audit and don’t need an audit to satisfy any regulatory requirements. There are also other ways to obtain what you may need without moving to a higher level of financial reporting service. These are what we call “nontraditional engagements,” the most flexible of which are called “agreed-upon procedures.” If one area of your organization and its operations is a concern to you, a CPA can be engaged to perform specific procedures, only in that area.

If you have any questions about which level of financial reporting is appropriate for your nonprofit organization, or which level may be required by state law, contact your G.T. Reilly advisor.