An excerpt from Linking Mission to Money

Chapter 18 pp. 86-87 "Communicating to Your Constituencies: The Outside Auditor"

THE OUTSIDE AUDITOR

The second publicly available document that you are legally required to produce, unless you are a very small nonprofit, is a financial statement audited annually by an outside accounting firm. Annual audited statements are often required if you receive monies from government agencies or certain foundations. Even if you aren't required to hire an outside auditor, it is a very good idea to do so, and it is money well spent.

We discussed in an earlier chapter the fact that the audited financial statement is fast becoming more arcane and less useful to board members and other users. Even so, it is still widely considered to be the primary, publicly available, financial report of an organization. It is fine if you choose to distribute your audited financial statement to donors and other interested parties, but don't confuse such a mailing with the financial communication we discussed previously. Mailing the financial report (or the IRS Form 990) is a nice gesture, but it is not likely to be an effective way to communicate to the vast majority of your constituents.

More importantly, the board must devote part of one of its meetings each year to the acceptance of the audited financial report. Because of this duty, it is important that board members figure out how to use the meeting with the outside auditor constructively, despite its arcane nature.

The annual audit meeting is an opportunity for you to have the confidential advice of an outside financial expert, your auditor. The purpose of formally meeting is so that the auditor can report on what issues were encountered, if any, in reviewing the financial statements the staff has prepared. You will almost always get a clean opinion, meaning that the auditor has no hesitation in saying that your financial statements present a fair picture of your financial condition. This is a pretty low hurdle to climb over, so I always look for more when I meet with the auditor. If your organization doesn't receive a clean opinion, you must probe very deeply to be certain you know, and are comfortable with, the quality of the information you are receiving from the staff and that your organization's financial health is acceptable. Since a clean opinion is the normal outcome, not having such an opinion can have very adverse consequences on your organization's ability to raise or borrow funds, and by extension to sustain your mission.

I urge you to view this meeting as your annual "stupid question" tutorial. Don't let the financial gurus on your board intimidate you. It is the duty of all board members to know the fiscal shape of the organization. The board should meet with the auditor and use that meeting as an opportunity to learn the "story" your auditor sees from the close examination of your books. Ask the auditor to compare this year with prior years and ask the auditor how the financial situation compares with what the auditor sees in its other clients. Don't let the audit meeting become technical and uninteresting; rather approach the meeting proactively and engage all board members in a probing discussion of the effectiveness and health of your organization with an informed, sympathetic, but objective professional.

Everyone on the board should receive at least two documents from the auditor before this meeting: the audited financial statements and the management letter (there are other "representation" letters, but they concern only the audit committee.) Many staff don't like management letters and many auditors won't write a management letter unless specifically asked. The purpose of a management letter is for the auditor to step away from the formalities of the auditing format and pinpoint for you all the things that concerned the auditor about your internal controls and management procedures, but which didn't rise to the level of formal findings, which are bad news. In other words, this is the stuff you really want to know about. Insist that before the meeting the staff write and distribute to the board and the auditor a response to each management comment that identifies a timetable to address each concern.

You don't need to study the management letter and response in detail beforehand; the important process is for the board to hear the staff and auditor go through the letter and responses together in your presence. Don't let the staff dismiss the comments as trivial: icebergs usually show only their tips. Make staff prove the comment is trivial by addressing it expeditiously. Make sure you find out from the auditor every suggestion he has.

The last parts of every audit meeting should be two private sessions: between the board, executive director, and auditor with no other staff present, and then between the board and external auditor with the executive director absent as well.

Linking Mission to Money
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