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To Audit or Not to Audit...

Updated: Jun 6, 2023

This quarter, Hope 4 All has been raising money to help Hugs Café pay for an annual audit. The total cost of this audit is $8,000. We contributed $4,000 to kick off this campaign in July and have raised $364.68 of the remaining $4,000. You can help us close this gap, and keep Hugs from diverting funds from program activities to pay for the audit, by donating here. All donations are tax-deductible.

Audits are one of those pesky behind-the-scenes activities that many donors won’t fund. Audits are an operational activity that are just part of doing business, not a program activity that directly benefits the community. Or so it seems…. In truth, everything that happens in a nonprofit impacts program activities, including mundane things like keeping the lights on, running a website, and, you guessed it, getting an audit.

Not every nonprofit is required to conduct an annual audit. In Texas, nonprofits with at least $10,000 in annual contributions must have current and accurate financial records, but an audit is not required. In lieu of an audit, some nonprofits conduct a review or compilation. So, what’s the difference and why get an audit if it’s not required? The Council of Nonprofits has some excellent resources that answer these questions.

What is an audit? The National Council of Nonprofits defines an audit as the examination of the financial statements by an accounting professional to determine whether they conform to accounting standards. An "independent audit" is performed by a public accounting firm or an individual who is a certified public accountant ("CPA") who is engaged to provide an independent opinion to the management whether or not the nonprofit's financial statements/records comply with accounting standards known as "GAAP" (generally accepted accounting principles.) In an independent audit the person conducting the audit is not a board member or an employee of the organization being audited, therefore the review is thought to be more objective than if the reviewer were under the control of, or controlled the nonprofit. (read more here)

What is a review? The objective of a financial "review" conducted by an independent auditor is to examine the nonprofit's financial statements and determine whether the financial statements are consistent with generally accepted accounting principles. A review shares the goals of an audit, however, a review is not conducted with the same level of investigation or analysis as an independent audit. (read more here)

What is a compilation? A compilation differs significantly from a review or an independent audit of financial statements. A compilation is literally a compilation of financial records into a format required by accounting standards. When this work is performed by an auditor it is referred to as a “compilation” and accounting standards require the auditor to assess whether the records are free from obvious errors. (read more here)

Here are the major differences between a compilation and a financial review or an audit:

1. During a compilation the auditor does not examine the internal controls that are used to manage the risks of embezzlement or fraud (which is part of an independent audit);

2. During a compilation the auditor will not collect and examine source documents (e.g. canceled checks or bank statements) to test the accuracy of the nonprofit’s accounting records (which would be part of the "testing" during an audit);

3. When conducting a compilation the auditor reformats the financial statements but does not make any determination of whether the account balances are reasonable by comparing them to his or her expectations (which is part of a review).

4. In the report after conducting a compilation, the auditor will not provide any opinion or assurance that the financial statements accurately reflect the financial position of the organization - which is a normal outcome of an independent audit. (read more here)

Like many nonprofits, Hugs Café is not required to get an audit, but it will open them up to bigger funding opportunities. In addition to proving a commitment to financial transparency, federal grants and sometimes funding from private foundations require applicants to include their audited financial to demonstrate the organization is financially sound and a good steward of donor funds. Some charity watchdog groups also consider audits when rating nonprofits. You can read more about this here.

Hugs is ready to grow and build a replicable model to further impact, but they need this audit to open the door to new funding opportunities. This funding will create a sustainable pathway to budget for future annual audits and ensures Hugs has the necessary documentation to demonstrate financial best practices. The 2018 and 2019 audit will help Hugs on their path to secure funding for expansion to a second Hugs Cafe in the North Texas area and an expanded online presence so more adults with different abilities will experience their four core beliefs: hope, understanding, grace, and success!

You can learn more about Hugs Café on their website or by watching our Awareness Wednesday features on the café, job coaching at Hugs, Hugs Fulfilled, Hugs Greenhouse, and Hugs Prep.

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