Choosing the Right Auditor for Your Non Profit Organization

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Donald Hart
7 years ago
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1 Choosing the Right Auditor for Your Non Profit Organization Recent legislation in the state of New York requires all voluntary fire districts with budgets exceeding $200,000 to have an annual independent audit performed by a certified public accounting firm. The new legislative bill will take effect, on or after January 1, 2007and requires the utilization of a competitive request for proposal process (RFP) when contracting for an annual audit. This new requirement poses a challenge for many fire districts because this will be the first time they will undergo the audit process. The negative articles published by Newsday over the past year (See ) have put many of the Long Island fire districts/companies in an unfavorable light. By engaging the services of a reputable accounting firm, your fire district will show that it takes accountability to the public, your donors and taxpayers of your community seriously. Finding an accounting firm that will work with you and provide a quality audit can be a tedious and confusing job. Our reference guide below can help take some of the guess work out of choosing the right CPA firm for your fire district. The auditor must be a Certified Public Accountant (CPA) or an Independent Public Accountant (PA). There is no way around this. If the accountant is not qualified, he or she cannot perform the audit. All CPAs are not auditors. Similar to a doctor that specializes in a specific medical discipline, being an auditor is a specialized field within the accounting industry. Even though all CPA s are required to take continuing education each year to maintain their license, the local CPA that files your taxes each year may not have the knowledge or practical experience needed for auditing. In addition, an organization that receives federal funding, either directly from a federal agency or through entities, such as a local government or other nonprofit organization require a Yellow Book audit or single audit. The fire district should consider whether the auditor has the necessary 1

2 experience in this area or can obtain sufficient knowledge and understanding to perform the services requested. Proper Qualifications Not all auditors specialize in working with not-for-profit or governmental organizations. These organizations usually get most of their revenue from some form of contract revenue, governmental funding or fund raising. Nonprofit and governmental accounting and auditing involve specialized and unique aspects of Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS). You should always make certain that the CPA firm matches your requirements. Additionally, an audit firm undergoes a tri-annual peer review and its members comply with annual continuing education requirements, typically these related to the audit field. An understanding of the industry, coupled with auditing experience are key attributes for a Fire District audit firm. To make sure the CPA firm has the proper qualifications to handle your audit, obtain the following information before picking the right firm: o The audit firm s background and experience specifically involving nonprofit and governmental organizations o The firm s size and personnel. o The resume of the person in charge of the audit and the qualifications of the assigned staff - this would include number of years audit experience, amount of experience in the nonprofit environment and professional certifications. o References from the local community o Assurances that the firm meets the Government Accountability Office s continuing professional education requirements if the nonprofit organization is subject to a single audit o The new law does not preclude your current auditor from participating in the bid process, however, best practices call for auditor rotation on a fairly regular basis (in this case, the law implies the engagement should be no longer than 5 years) The auditor must be independent. The AICPA Code of Professional Conduct requires independence in the performance of audit or attestation services. What does the term independence mean when picking the right CPA firm to perform your audit? Traditionally auditors provide other services to their audit clients. 2

3 Recent independence rule changes have restricted these nonattest services, including: o Prohibiting your auditor from doing many kinds of consulting formerly allowed (such as installing and designing software, providing valuation services, performing bookkeeping services, and providing actuarial services for a retirement plan) o Having an your auditor serve on the governing board of your organization. If your auditor serves on the board this prevent him/her from performing an audit since they would be in a position of management, which would impair independence. o Having a member of your fire department/district or a close friend or relative of a Board member perform your fire district s annual audit would also impair independence. By engaging the services a CPA firm with no relation to your organization, you show the public that you understand the seriousness of the new audit legislation. The last that thing your Fire District would want is to have another slew of nasty newspaper articles about the fire departments being a Good Ol Boys Network by hiring friends and members to perform the audit. The best rule to follow is not to use your auditor for any services besides audit, agreed upon procedures (a form of attestation services) and tax preparation work. Research Prospective Audit Firms o Investigate the potential CPA firms by visiting the New York State Department Education Office of the Professions website at to confirm if the individual and the firm are both licensed and whether or not there have been any violations. o Another thing to consider: do a Google search for the firm. See if there are any positive or negative comments or articles about the firm. o Ask for a list of references of clients that the firm is currently handling. This is a great way to speak with another non-profit organization to find out what an audit is really about and what kind of service the auditor will provide. 3

4 Good auditing is not cheap! This cannot be stressed enough. When choosing an auditor, it is in your organizations best interest not to choose the lowest bidder. Bear in mind, that the first year of the audit is often the most difficult year. Sometimes auditors will walk into an audit in which the client has poor bookkeeping and records management. Therefore, a multiple year bid might be most cost effective. Some things to consider when negotiating prices are: o Qualifications and training of the staff that will be working on the audit. Remember, CPA firms have standard billing rates for different levels of personnel. Common positions, in descending order are, partner, manager, senior accountant, and staff level accountant. Know how many hours each audit staff will spend on the audit and who will be doing the audit work! o Amount of assistance the CPA firm expects from the client. A good auditor should provide your organization with a list of what paperwork and documentation is required well before the audit fieldwork actually commences. This gives the auditor ample time to familiarize him or herself with the client s financial information and the workings of the organization. We have provided a sample of what to expect during the first year audit as a supplement to this guide. It can also be found on our website o Any prospective auditor should conduct a potential client acceptance or quality assurance review with the prospective client. This gives the auditor an opportunity to gain a basic understanding of the client s financial operations and information available to audit, as well as the workings of the organization. Ultimately, this process ensures he or she is qualified to conduct the audit and risks associated with conducting the engagement are acceptable. o The results of the firms most current external peer review should be presented for review. o The CPA firms data exchange/processing capabilities. The more manual processes that the CPA firm needs to perform to accomplish the audit, the more time and ultimately money. See if you can automate the process as much as possible by having the 4

5 financial records in electronic format or make sure that the records are very organized in the absence of computer records. o Request that the CPA firm provide a price to prepare the IRS Form 990 as part of the annual engagement. In addition to the complexity and changing tax laws and regulations needed for filing, it can also save your organization time and money. The benefit to doing this is that the CPA firm is already knowledgeable of your organizations and financial records so the fee will be greatly reduced. All of these things take time and money, especially in the first year when CPAs incur certain startup costs and must set up certain permanent files for a new client, which will force the initial audit to take more time. Likewise, any organization incurs startup costs in looking for, engaging, and preparing for a new auditor. Remember: Good auditing costs money. Craig, Fitzsimmons & Michaels, LLP Certified Public Accountants Smithtown, NY NPO-CPAS 5

PROFESSIONAL ETHICS EATING TIME. AICPA Professional Ethics. This is the first ethical dilemma you will be faced with, so lets discuss it.

PROFESSIONAL ETHICS EATING TIME. AICPA Professional Ethics. This is the first ethical dilemma you will be faced with, so lets discuss it. PROFESSIONAL ETHICS CHAPTER 3 EATING TIME This is the first ethical dilemma you will be faced with, so lets discuss it. Short term benefit to you Long term impact to the engagement Impairs business decisions