Nonprofits face new audit standards beginning in 2007

Audit committees and boards reviewing audit reports for 2006 are hearing surprising new criticism of their organization’s internal controls. Many nonprofits that in the past had uneventful audits are finding that, according to a new accounting standards, what was formerly good practice no longer makes the grade.

Officially known as “Communicating Internal Control Related Matters Identified in an Audit,” or SAS 112, the new standards are more stringent. Auditors have always looked at the quality and sufficiency of internal controls, but the new standards have raised the bar throughout the nonprofit sector as weaknesses in internal controls are observed and highlighted in management letter’s to boards of directors citing weaknesses and recommending action.

The quality of nonprofits’ internal controls has not changed, but the standards by which they are evaluated have. SAS 112 has thee aims:

• To provide new definitions and terminology to identify internal control weaknesses.
• To allow auditors less discretion in identifying weaknesses as significant or marginal.
• To require auditors to apply more stringent standards that consider combinations of weaknesses as well as quantitative and qualitative factors.

For more on the new auditing standards, click here to see Kate Barr’s article in Nonprofit Quarterly, “Navigating the New Audit Standards.”