For a growing nonprofit, the first independent audit is a milestone. It often arrives because revenue has crossed a threshold, a major funder requires it, or the board decides it's time. Whatever the reason, it changes what the organization needs from its finance function, and from the person leading it.
Why a First Audit Raises the Stakes
Many small nonprofits manage their finances well for years with a simple setup: a bookkeeper, an outside accountant, and an Executive Director who keeps a close eye on the numbers. That can work until an audit is on the horizon.
An audit asks the organization to demonstrate, with documentation, that its financial statements are accurate and its controls are sound. Revenue must be recorded correctly, restricted grants tracked and released properly, expenses allocated across programs and administration, and in-kind gifts valued and reported. Practices that were informal suddenly need to be consistent, documented, and defensible.
An audit doesn't just review the past year. It tests whether the organization's financial systems are built to last.
Common Areas That Need Attention
Every organization is different, but a first audit tends to surface the same handful of issues:
- Restricted funds. Tracking donor and grant restrictions and recording their release when conditions are met.
- Functional expense allocation. Allocating costs across program, management, and fundraising in a reasonable, documented way.
- In-kind contributions. Valuing and reporting donated goods and services. Accounting standards require contributed nonfinancial assets to be presented separately in the financial statements.
- Inventory. For organizations that hold or distribute goods, reconciling what's recorded in the books with what's physically on hand.
- Internal controls. Separating duties, documenting approvals, and keeping reconciliations current, even with a small team.
Your auditor is the best source of guidance on what will be required for your organization specifically. But the person who will do the work of preparing is your finance lead.
What to Look For in the Finance Hire
If an audit is coming, a few qualifications rise to the top:
- Hands-on audit experience. Someone who has prepared schedules, answered auditor questions, and worked through an audit before knows what to expect and where the pressure points are.
- Nonprofit fund accounting. Experience with restricted funds, grant compliance, and functional allocation is essential, and it doesn't always transfer from for-profit accounting.
- Systems thinking. The ability to look at current processes and improve them, not just maintain them.
- Strong communication. The finance lead will work with the auditor, the Executive Director, and the board, and needs to explain issues clearly to each.
Candidates with this profile often come from CPA firms with nonprofit audit practices, or from finance roles at organizations that have already been through the audit process. They have seen it from the inside and can bring that experience with them.
Hire Before the Pressure Hits
The best time to make this hire is well before fieldwork begins. A new finance lead needs time to learn the organization, clean up the books, and put processes in place. Hiring in the middle of audit preparation puts a new person under unnecessary pressure, and puts the audit at risk.
A first audit is a sign of growth. With the right person in the finance seat, it can also be the moment an organization's financial foundation becomes genuinely strong.
This post is general guidance, not accounting advice. Your auditor can advise on the specific requirements for your organization.