 I'm extremely thrilled to welcome all of you to another episode of The Non-Profit Show. If you just joined me, you heard that I have been waiting, patiently waiting for Deb Nelson to join us. Deb is the partner in charge of Non-Profit at Ide Bailey. And I've had the opportunity to meet you, Deb, as I participated in your resourcefulness award. And maybe you can share a little bit about that briefly as we get going. But excited to have Deb talk to us today. The next slide we're gonna show you is the topic for the episode. So when it comes to financials for non-profits, Deb is going to shine the light on what it looks like for audited versus reviewed. So that is today's episode, today's topic. I'm excited to get into the weeds of that, although it doesn't feel like weeds. I'm really excited so much so that I have my glasses on like, you know, they're on deck, they're ready. But I wanna thank, as I think every episode from, you know, the deepest of our hearts and just sincerely appreciative for all of these presenting sponsors. We appreciate you supporting the Non-Profit show. We appreciate you supporting all of our guests that we're able to attract and have on to the show. So thank you, thank you, thank you. And again, tomorrow's our 300th episode and we would not be here without each and every one of these companies. So Julia, I am so thrilled that you came up with this grandiose idea. Julia Patrick is the CEO of the American Non-Profit Academy. I'm Jarrett Ransom, also known as the Non-Profit nerd. That's when I put on my glasses. But I'm super excited because I get to nerd out with you every day. When we started this, as you remember, we were saying how it's such a labor of love and now it has truly become the ritual that I love waking up to. So here we are, 300th episode Eve and we have Deb Nelson with us and we are talking about all things financials. Welcome, Deb, thank you for joining us. Thank you so much for having me. I've been looking forward to this as well. Good, you just had to get through that thing called tax season. Yes, we did. That little thing that's like really big in your world, yes. Yes. Now I have to tell you Deb, you and I have never worked together and we haven't met other than the Non-Profit show. But when I first wanted to make a career change and sell my business, I've been in the publishing industry for 30 years, I spoke to two partners of I Bailey in my community, Rob Leslie, the late Rob Leslie and Brenda Blunt. And I told them I had this like crazy idea and they were like, I was at a coffee shop, not too far from my office. And they were like, holy cow, are you kidding? And they're like, we'll do anything we can to support you. And we hit it off and that was really how the American Non-Profit Academy got started from that cup of coffee and from I Bailey being such a legendary leader in the Non-Profit financial leadership, accounting leadership community. And so I think their confidence gave me confidence that my idea was right. So I just wanted to share that. Having said that now, I Bailey, how many states are you in? Oh gosh, we're growing all the time. I believe we are in 15 states. We have more than 40 offices. I think of our firm as everywhere west of the Mississippi right now. And since I have been with the firm for more than 16 years and it's incredible to see the growth that we have had. And what I love is non-profit is a specific focus of our firm. It's not something we dabble in. We have non-profit clients in all of our offices across the nation. And it's just been really fulfilling to be able to focus my career serving the sector. Wow, good for you. Before we get into the financial piece, I think it's really important for you to give us a little bit more information about how this really is a different type of practice. If you're a non-profit and you have a CPA on your board and you think, oh, well they're gonna handle everything, that's not really true. You need to have a practitioner that understands the non-profit sector, right? You absolutely do. Non-profits are unique. And I feel like they are very complex businesses because you have so many different stakeholders that can be relying on you, whether it's donors or the people that you're providing a service to, you're bored. There's just so many different elements to it. And then we have this thing called restricted funding and that's assets. And it gets complicated very quickly. So it's really important to have people on your team that can be providing that industry expertise to make sure you keep going down the right path. Right, good. Okay, well, I always think that sometimes we think, oh, well, it's just the same type of business. It's like the legal profession. No, there are attorneys that just deal with the non-profit sector. It's different. It's very different, yeah. Okay, well, we wouldn't really get into something that I think is sometimes a mystery and that is the financial audit. And we always get like, well, we're not big enough or we're too big or it was big or it's like this big drama. Let's back up and say, what is it? I think that's a great place to start to make sure everyone has an understanding of what we mean when we're talking about a financial statement audit. So this is where you're going to have an independent auditor or CPA come in and with the goal of providing an opinion on whether or not those financial statements comply with what we call generally accepted accounting principles or GAP and then also whether those financial statements are presented fairly. Auditors are responsible for obtaining reasonable assurance about whether the organization's financial statements are free of material misstatement. And I know as you may be saying, well, what is a material misstatement? And that's going to be any information that's within your financial statements that essentially means it can impact the decisions of those who are relying on those financial statements. So you do not want to have any material misstatements within your financials. And as part of the audit process, there's this thing called an opinion that gets issued. So this is generally going to be found in the beginning of your audit report and there's four different types of opinions that an independent auditor can give. The first one is going to be an unqualified opinion. That's what we refer to as a clean opinion. This is what you want when you're going into an audit. It's the best case. That means there are no material misstatements. Your financials are presented in accordance to GAP and it's free of material misstatement. The next kind of level of opinion would be what's called a qualified opinion. And this is essentially saying there's some component within your financial statements that is not adhering or complying to GAP, but there's overall no material misstatement. So it's kind of second best, I would say. Then we get into the last two, which is an adverse opinion. And that really is stating that there's either a material misstatement or you are overall not complying with GAP. So an adverse opinion is something that I would say is one of those red flags. I was about to say that doesn't sound good. No, you do not want an adverse opinion. And then the last one is just a complete disclaimer of opinion. And that means regardless of the level of work that has been done, the CPA is still not able to actually come to providing an opinion. So again, that would not be a good thing to have. And there are certain cases where in an organization or management may be okay with a qualified opinion. For example, I've seen this come into play if you have organizations that have some related entities. And for whatever reason, management may choose not to consolidate in one of those related entities to its audited report that could result in a qualified opinion just because it's not in conformity with GAP. So I think it comes down to just understanding what you're really looking for within this audit and having those upfront discussions with your CPA. Now, let me ask you this. Let's say you want number one. I mean, you want the best situation. You're moving through, you're moving through. Your auditing team comes back and says, yeah, this is not going well. Are you given the opportunity to, I don't know if the word comply or to correct or to provide more information so that you can move out of that? I mean, is this like a give and take kind of environment? You know, there is a little bit. It depends on the unique situations, but in the end, our responsibility as auditors is really to ensure that the board has an understanding of where things are at. And it's our duty to make sure that we're disclosing are there certain adjustments that were uncovered as part of the audit? Were they material or not? Management sometimes has the option to pass on making the adjustment depending on what level it is. So I mean, communication is a huge part of this process. And we always say an audit should not be a one-time event where you are not talking to each other until fieldwork rolls around because ultimately there's gonna be surprises that come up and no one likes surprises in the financial area. So it's so important to be having that year-round relationship as questions come up if certain unique transactions are being entered into. I mean, think about this last year with all of the different COVID funding programs. And it was more important than ever that firms and organizations be having those discussions about how do we record this? How is this going to impact our financial statements? Yeah, lots of things to think about. That is so right because I'm thinking, and I love that so many funders said, I know that we said this was restricted funding but due to the pandemic and in light of current events, please feel free to use that money and that funding however you need, best fit for your organization. So now we've just taken, pardon me, restricted dollars into unrestricted and that changes accounting principles. That is definitely not my wheelhouse and that's why it's so important to really partner with a firm that this is your wheelhouse. I agree. I think having that collaborative relationship is so important. And yes, there must be independence. So financial statements are still the responsibility of management and we can't be coming in and making those types of decisions on behalf of an organization, but that does not mean you can't have a collaborative relationship. Right. Wow. The win-win. It is. So now the big question like, I'm gonna probably say the big question a lot this morning. But Deb, we hear two things. We hear the audited financial and a reviewed financial. They're two very different things and can you explain to us how they work? Yes, they definitely are two very different things. So a review is going to be substantially less in scope. It's going to provide limited assurance that there's no material modifications needed within your financial statements where an audit is kind of seen as the highest level of assurance that can be provided. Our review is going to focus more on using analytical procedures and having those inquiries of management. You still will get a report that's issued as part of your review, but on those pages, it's specifically going to say that we are not issuing an opinion. And instead your review is going to say, we believe that there's no material modifications needed and to comply with gap. So that is a really important distinction. And that's something to be aware of depending on the reason that you're doing an audit. Sometimes it's because you need that opinion. But if that's not part of the process, a review is a really good alternative. There's no review of internal controls when you're having a review engagement, whereas under an audit part of the procedures to do an audit is you have to have a good understanding of what are the internal controls in place at the organization. So that is part of an audit process, not a review. Another good distinction is a review does not involve any type of confirming of balances with third parties. So again, you're relying on just the analytical procedures and inquiry of management. I have a question. I've written several grants when I started my firm, 2009, I really was known as the grant writer in my community. I no longer do that anymore, but I was learning through this whole process that so many grantors, funders, if you will, required audited financials. Now, I'm curious because I, again, I also coach my clients that have a conversation with the funder, ask if reviewed financials will fit the bill just as well. But I'm curious if there's like a threshold when it comes to operating budget, like does an organization need audited versus reviewed at a certain operational budget? Great question. A lot of the requirements come into play from various stakeholders. So states now, if you are registered as a charitable soliciting entity within a state or multiple states, that is oftentimes where I see a lot of the requirements come into play for either an audit or a review. For example, I'm sitting in Minnesota and we have a very active attorney general in this state. And they would say if you are a soliciting charity in Minnesota and your gross receipts are more than 750,000, you have to have an audit done. So it's the attorney general's offices that oftentimes are putting these requirements in place. And they can either require an audit or I've also seen states say if you're at a certain threshold, we'll also accept a review. But it's not uncommon to have that as a requirement. And I think that can take organizations off guard as they're maybe growing and not realizing that those requirements are in play. It's also not uncommon if you're just getting other types of federal, state or local county funding through contracts or reimbursement grants. Oftentimes they're going to have a stipulation in there where they're going to require an audit or sometimes a review. But I think that's also important to know. And what we ran across this last year with all of the COVID legislation is many organizations were getting different types of federal funding. And there's this thing called a single audit which you can be subject to if you have or if you're expending in a single year more than 750,000 of federal awards. So again, it's very important to kind of be keeping that top of mind and thinking about where your funding is coming from because not only could you have to do a financial statement audit, you could also have to do a single audit. And the purpose of that is just to ensure that those funds are in compliance with the government requirements but it means it's a much more in-depth audit than a financial statement audit. So probably not something people look forward to having to do, but it's a stipulation of receiving funding. You know, Deb, this makes me think that it's even, if we needed one reason to have an accounting firm that deals with the nonprofit sector, that's it. I mean, just because if you miss some of these demands or requirements, I mean, it could just be catastrophic. You know, it can have a big impact. For example, if you realize that you needed an audit and you're, for example, I'll use the attorney general's requirement, they will say you can no longer actively solicit in our state until you're in compliance with this requirement. So that has a huge impact. It also then would impact you from a public perception standpoint if your stakeholders are seeing that you aren't up to date on registrations and requirements. And yes, it's a big deal. Those are serious implications. And as Julia said, really important, I'm probably gonna continue to stay on mute because I don't wanna cough on everyone. That's so insightful. It is, thank you, Jarrett. I feel badly that you're like dying over here. Well, and Jarrett, you mentioned that some grantors require, you know, an audit review. And I would say that's also common. And I think organizations should not be afraid to push back on that a little bit because, you know, we're gonna talk about costs probably later in this session, but audits, reviews, all of that comes with a cost. And I think grantors sometimes put these requirements in applications without fully thinking about the impact that that has on an organization's budget. And is that really going to provide, you know, the value that they're looking for in relation to that request? So having that discussion with funders is very important. Just don't assume that, oh, this is something we have to do. Okay, let me ask you this question. It wouldn't be appropriate, or have you ever seen anyone say, yeah, this is great, but you're gonna need to fold that cost into our application. Yes, I have. I have seen funders also go to organizations where maybe it isn't a requirement in their initial application, but as that relationship has grown between the funder and the nonprofit, they identify that there's some needs for maybe strengthening governance operations or other things within finance, and they will provide funding to get organizations kind of up to par with where they should be. And I think that is fabulous. It helps improve the sector so much. It does, and that's part of what you said in the very beginning, use that magical word communication and transparency to add that on and to say, look, yeah, we need these tools, we want this help, we want this insight. It will help us across the board with our community, our funders or stakeholders, but the reality is this is an expense that is pretty significant. Before we get into that, I have one more question, and this might seem like a totally bizarre question, but is it possible to do kind of like a hybrid where maybe one year you do the full audit and then the next year you do review and then you go back to audit and then review, or do you have to pick one and kind of stick with it? You absolutely can do a mix and we've seen some organizations, I mean, because you can fall in and out of having to have an audit as well as your revenues fluctuate. So, it could be if one year you had certain grant funding that pushed you over that limit and you had to have an audit, the next year maybe you don't have that and you drop below, then the question is, will we continue to do an audit or do we reevaluate what's going to be best for the organization? And yes, you can drop down, you can do a review. There's lots of different options and I think the thing to consider is just your long-term growth plan and where you think the organization's operations are going to be because anytime you kind of stop doing an audit and then want to pick that back up, there are certain procedures that have to be done then over those beginning of your balances before you can really move forward with completing that audit again. So, it could impact costs if you're kind of fluctuating back and forth and there isn't that consistency but it's definitely an option. Okay, cool. Because again, there's just so much change given this all going. Okay, so we have a question that came in and I'm gonna read this to you and we can deal on it or not. I recently joined a board of a large nonprofit, $18 million annual budget and I serve on the Finance and Board Governance Committee. The monthly report consists of general categories of revenue and expenses, just six expense categories. In my 25 years of experience as the CEO of nonprofits and serving on boards, we always provided, received detailed monthly financial reports. It would include things like the rent, salaries, et cetera. Is this brief or financial report that this $18 million nonprofit and new standard? So this is a little bit out of the wheelhouse and I also wanna remind everyone that when we have guests on from the legal community or the accounting community, they are giving an opinion and they're not speaking directly as an authority for that question. Did I phrase that correctly? Thank you, you did great with it. Well, you know, I need to honor our guests' professionalism and so I don't, you know. It's not your first rodeo though. No, I'd be happy to give my thoughts on that question though. I think management often struggles with how much information do we provide to a board or a committee and where are they going to start to tune out? And I think they, I have seen organizations move more to providing more concise brief information than providing all of the detail. And certainly specific dashboard reporting I have seen be very common where we pick what are those key performance indicators that we wanna keep our eyes on that we think is important for the board and the finance committee to know. And that's kind of the summarized information that we present. However, I also don't think it's unreasonable for any board member, especially finance committee member that if you want to see more detail, I would ask for that. There should be no reason that they don't provide that to you. And again, it could be they're just trying to limit the amount of information that's being thrown at the board. I think that's really good advice. And I agree that, you know, looking at who, where you are in the spectrum of leadership with your nonprofit board, absolutely. You know, those finance committee members, God bless them, they do brutal work. And part of that, and we wanna ask you this question, what are we looking at when it comes to cost step? Because you've given us a really interesting landscape with which to choose, but this involves highly educated, specialized CPAs and firms, this is not an inexpensive deal. It is not. And, you know, obviously it's going to vary depending on kind of where you're at geographically and other factors. But I think anyone going into thinking about an audit should expect to pay no less than $10,000. And that's for a very small organization with simplified operations. And the reason I say that benchmark is, regardless of what size of organization you are, there's always going to be that base level of work that has to be done from an audit standpoint, that that's just kind of part of the fixed cost of having an audit. And then from there, depending on the complexity of your funding streams, your investments, all of these different things will add on to the cost because of the different procedures that have to be done in order to provide that opinion. So starting at $10,000 for an audit, I would say a review, it generally is going to be about half of what an audit would be. So there is a substantial difference in that cost. And again, I think it's important to know what is the purpose that you'd be entering into this type of engagement, assuming it's maybe not a requirement that you have to have one or the other, but you can choose to have these out of your own reasons, whether it's to show your commitment to accountability and transparency, or if it's more considered a board best practice, we're going to do this, those costs need to be considered for what option you do. Yeah, I appreciate you giving us that lens. Yeah, I agree. And I have had these same conversations with nonprofits that are just breaching the threshold of needing an audit, and then making the decision, the commitment to invest in an audit, but asking someone specifically, I call them those angel donors, those that are kind of like the blank check donors, you name it, they'll be there and they will support you. And if you share with them the importance of an audit and the rationale behind that investment and what it will be impact the ROI, there's typically someone that will help fund this specific initiative. Yes, and one other thing I was going to bring up briefly is I don't think many people are aware of this option, but there's also something called agreed upon procedures, where it's not an audit, it's not a review, but if you're just looking for someone to come in and take a deeper look, let's say you have accounts receivable is a major component of your organization and you want some assurance over how you're accounting for things or the processes and procedures being followed appropriately. That's where a CPA would come and sit down and actually agree with the organization in advance of what types of procedures, what they're going to look at, and then they go through and perform some procedures and tests and then come back and just provide the factual findings. So there's no opinion, nothing of that nature, but yet that can be really valuable information to management and a board, especially if you've got questions over payroll compliance or expense reimbursements, inventory, AR. I mean, you can just pick certain procedures and really customize then the value that you're wanting to get out of that. Well, I would imagine that just in terms of security, just the protection of your organization. Hard to believe we don't have much time left, but I know it goes really fast, but I have to get this question in because I'm very, very curious if this information is public or private, like how far along do you share this information to the community at large? So I know a lot of organizations will post their audited financial statements, their 990, their governing documents, all of those things out on their website, and that's purely from their commitment to transparency. There is no requirement that they do that. I want to make that very clear that there is no requirement that you have to do that. Otherwise I've seen organizations take some of their financial information and they present it publicly more in the form of an annual report where they're not putting the entire audited financial statement out there for the public. I think people can access also audits if they go to the attorney general's office. So we talked about that charitable solicitation requirement or oftentimes you have to attach an audit. You can go then to the attorney general's office as someone from the public and access it. So there are ways that this data can become available, but there is no requirement outside of a single audit. I will say that's a caveat that is required to be available. But with this virtual environment that we've been in, I mean, these documents are being shared through portals, through email sometimes. And I have seen a best practice where anytime a board is sharing these types of sensitive documents in a portal where you have some restrictions in place where either it cannot be downloaded, it can only be viewed and for a certain amount of time and then it's pulled off. I think some of those things are important depending on the nature of the information that's contained in the report. Wow. Well, you have been amazing and Deb, I wanna get Deb's information up here. I Bailey and Jared and I have worked with your firm in many different ways across our community. My very first board experience where an audit was being conducted was with an I Bailey group. And I always like to say, 20 plus years, they taught me the right way to look at this. So they trained us. So I Bailey, check them out. Again, they have this wonderful sector segment within their practice that just deals with the nonprofit sector. Again, I'm Julia Patrick. I've been joined by Jared Ransom. Ms. Jared, I hope you feel better. Thank you. I will, it's a matter of time. It is, it's of cold, but we'll have you back in tip-top shape because tomorrow, along with our sponsors, we have our 300th episode. We've had more than 250 guests. It is a milestone in broadcasting. I have to tell you, it's really a cool thing. So join us tomorrow. We're gonna do something a little different. Friday is normally asked and answered. We're gonna spend tomorrow talking about the future and all of the things that we think is gonna really impact this recovery. And a lot of this comes from our guests and our sponsors who've shared their ideas and things that we've been able to learn with the nonprofit show. As we like to remind everyone, and especially Ms. Jared with how she's feeling, stay well so you can do well. Thanks so much, everybody.