Nonprofit Resources

Compilation, Review*, or Audit*: Which Financial Reporting Service Is Right for Your Nonprofit?

Accurate and timely financial statements are essential for nonprofit organizations. A variety of stakeholders, including management, board members, donors, grantors, lenders, and membership organizations, rely on these statements to make informed decisions and assess the organization’s financial health.  

Independent accounting firms offer three primary reporting services to help: compilations, reviews, and audits. Each provides a different level of assurance* about whether the financial statements are presented in accordance with the applicable financial reporting framework. They also vary in terms of time, cost, and complexity.  

Which service is right for your nonprofit depends on several factors, including: 

• Organizational size and complexity  

• Regulatory and compliance requirements  

• Funding sources  

• Donor and grantor expectations 

• Board governance policies 

An overview of each service is below, followed by a comparison chart to help guide your decision. 

Compilation  

A compilation is the most basic of the three services. In this engagement, the CPA assists your management team in organizing financial data into standard financial statements.  

CPAs must perform compilations in accordance with the AICPA’s Statements on Standards for Accounting and Review Services (SSARSs). The CPA reads the financial statements to ensure they are presented in the appropriate format and are free from obvious material errors. However, the CPA does not perform detail testing, analytical procedures, or inquiry, and does not provide any level of assurance about the compiled financial statements.  

Independence is not required for a compilation engagement, but if the CPA is not independent of the organization, this must be disclosed to the users of the financial statements. 

Compilations can be a cost-effective option for smaller organizations with limited external reporting requirements and stakeholders who do not require the higher level of assurance provided by a review or audit. Additionally, compilations can be helpful to organizations that file Forms 990, as the information from the compilation can be used to prepare these forms. 

Review  

A review is intended to provide limited assurance that the CPA is not aware of any material modifications needed for the financial statements to conform with the applicable financial reporting framework. 

With a review, the CPA must comply with SSARs and perform analytical procedures and inquiries to identify any obvious issues. The CPA does not obtain an understanding of the organization’s internal controls, assess fraud risk, test accounting records, or perform other procedures typically provided in an audit. Unlike a compilation, the CPA is required to be independent of the organization. 

Reviews can be a good option for nonprofits whose board, funders, or other stakeholders want a limited level of assurance about the financial statements, but don’t require an audit.  

Audit 

An audit is the most comprehensive and rigorous financial reporting level a CPA can offer. It provides reasonable assurance (defined as a high but not absolute) that the financial statements are free from material misstatement.  

During an audit, an independent auditor conducts a thorough examination of your financial records, including detail testing, confirmation with third parties, and an assessment of internal controls. The auditor must perform this service in accordance with generally accepted auditing standards (GAAS) and issue an opinion on whether the financial statements comply with U.S. generally accepted accounting principles (GAAP).  

Audits are often mandated by government agencies, grantors, lenders, or the organization’s bylaws. They are the most time-intensive and costly of the three options but provide the highest level of credibility and can strengthen donor confidence and board oversight.   

Compilation, Review, and Audit Comparison  

The level of financial reporting service best for your organization depends on your internal needs and the expectations and requirements of external stakeholders such as your financial institution, donors, and grantors. Generally, the greater the level of service provided, the more time and resources your CPA will need to complete the engagement.  

	Compilation	Review	Audit
Level of assurance obtained by the CPA/auditor that the financial statements are not materially misstated	CPA does not obtain or provide any assurance that there are no material modifications that should be made to the financial statements	CPA obtains limited assurance that there are no material modifications that should be made to the financial statements	The auditor obtains a high, but not absolute, level of assurance about whether the financial statements are free of material misstatement
Overall objective	To assist management in presenting financial information in the form of financial statements without undertaking to provide any assurance that there are no material modifications that should be made to the financial statements	To obtain limited assurance that there are no material modifications that should be made to the financial statements	To obtain a high, but not absolute, level of assurance about whether the financial statements as a whole are free of material misstatement, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects
The CPA is required to be independent	Not required to be independent for a compilation, but would be required to indicate lack of independence in the report	✓	✓
The CPA is required to obtain an understanding of the entity's internal control and assess fraud risk			✓
The CPA is required to perform inquiry and analytical procedures		✓	✓
The CPA is required to perform verification and substantiation procedures			✓
Situations requiring different levels of service	Generally appropriate for smaller, less complex organizations and often prepared for simple situations (e.g., a lender needs GAAP financial statements instead of the statements the internal accounting system produces, or the lender needs the confidence provided by knowing that a CPA read the financial statements)	Often prepared for organizations because of requirements of outside third parties (such as banks, donors, and membership organizations) that are looking for comfort that there are no material modifications that should be made to the financial statements, or because of board or other organizational requirements	Often prepared for organizations because outside third parties (such as banks, donors, and membership organizations) require an auditor’s opinion on the financial statements, or because of board or other organizational requirements
Differences in costs for each level of service	Involves the lowest amount of work and as a result is far less costly than a review or audit	More costly than a compilation but substantially lower in cost than an audit	Involves the most work and therefore the cost is substantially higher than a review or compilation

Choosing the Right Service for Your Nonprofit 

Selecting the appropriate financial reporting service starts with choosing an accounting firm that understands the unique complexities and requirements of nonprofit organizations. The right level of financial reporting can enhance transparency, strengthen stakeholder trust, and support your mission. 

CapinCrouse has served mission-focused nonprofits, churches, and higher education institutions exclusively for over 50 years. We understand the importance of financial accountability in this dynamic environment and are here to help you evaluate your options. 

Please contact us with questions or to learn how we can empower your organization with the financial reporting services that best fit your needs.  

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