What Not-for-Profit Organizations Need to Know about Financial Reviews

Understand the nuances of financial reviews

It’s common knowledge in the not-for-profit (NFP) world that Section 501(c)(3) of the Internal Revenue Code (IRC) establishes that a not-for-profit organization that meets certain criteria is recognized by the IRS as having tax-exempt status. As a result, the organization is precluded from paying tax at the federal, state, or local level on any net income or profit. 

Not-for-profit organizations must keep detailed records of their activities to preserve their tax-exempt status and meet other requirements. Financial reviews can help them maintain organized records, comply with the law, and provide transparency to donors. This can be a cumbersome process, but not-for-profit organizations do not have to shoulder the burden on their own.

What Are Financial Reviews for Nonprofits?

A financial review provides varying degrees of assurance that the organization is following generally accepted accounting principles (GAAP) and keeping accurate records free from errors or fraud. The organization engages an independent accounting professional (certified public accountant or ‘CPA’) to perform a review of its financial activity. The three common types of financial reviews are compilations, reviews, and audits.

The scope of the review, ranging from a compilation to an audit, will depend on factors like the size of the organization, the complexity of its operations, and the expectations of its stakeholders. Since nonprofits bear the expense of a financial review, cost will be a consideration.

What Is a Compilation and When Might a Nonprofit Need One?

A compilation is the least formal type of financial review. The CPA’s role is limited to compiling the NFP’s financial statements into a GAAP-compliant format. There are no verifications or assurances that the information contained in the financial statements is accurate. The auditor does not offer any opinions about the reasonableness of the information. Their only certification is that the financial statements meet GAAP format requirements. A compilation is the simplest type of financial review. As a result, it also tends to be the least expensive. 

What Is a Review and When Might a Nonprofit Need One?

A review is much more in-depth than a compilation but not as extensive as an audit. The review service is one in which the CPA performs analytical procedures, inquiries, and other procedures to obtain “limited assurance” on the financial statements and is intended to provide a user with a level of comfort on their accuracy. 

A review is useful when organizations need to confirm or demonstrate that their books are in order. It might be necessary to conduct a review as a condition of receiving a grant or to comply with local or state government regulations. In New York state, for example, NFP’s with gross annual revenue and support over $250,000 but not more than $1 million must file an annual reviewed financial statement with an independent CPA’s review report. 

What Is an Audit and When Might a Nonprofit Need One?

An audit is the most comprehensive form of financial review. An auditor conducts a careful review of an NFP’s financial statements and its internal control mechanisms, and independently verifies the accuracy of the information in the financial statements. The final report provides assurance that the financial statements are free of material misstatement and are fairly stated in accordance with GAAP. 

Since an audit is the most extensive type of financial review, it also has the highest cost. A not-for-profit organization might need to conduct an audit to obtain certain grant funding or it may be required by the NFP’s bank. In New York State, NFP’s with gross annual revenue and support over $1 million are required to file an audit performed by an independent CPA with their annual state tax filing. 

Is Your Financial Review Providing Adequate Protection for Your Nonprofit Organization?

Financial reviews are done annually and while they can provide a certain level of assurance to your funders and governance board, issues may go unnoticed or unresolved for over a year. Engaging a knowledgeable CPA partner like MAXIS® by Freed Maxick can help to monitor compliance and internal controls on a continuous basis. 

MAXIS is a high-tech outsourced accounting solution created to provide you with more certainty in an ever-changing and continually complex not-for-profit world. Your MAXIS team will provide an internal control environment that will give your governance board a level of comfort that proper oversight is in place without the need for a review or audit.  And if your NFP exceeds the revenue thresholds your MAXIS team will assist your NFP in maintaining accurate books and records as well as prepare and maintain the back-up schedules to make the review or audit as seamless as possible. 

Learn More About What Level of Assurance is Right for your Nonprofit Organization

The experienced, insightful Not-For-Profit accounting professionals at Freed Maxick can support your NFP through financial reviews freeing you to focus on your mission. For a complimentary nonprofit accounting consultation, contact Holly Hejmowski, Director of Assurance and Advisory Practice, directly at Holly.Hejmowski@FreedMaxick.com.