Nonprofit organizations, just like other corporations, must prepare reports on their financial performance. These reports help management make operating and strategic decisions. They also provide outsiders, such as funders and oversight bodies, with the information necessary to evaluate the agency’s operations.

Since not all organizations need the same level of evaluation, Certified Public Accountants (CPAs) have developed three different levels to cover different requirements and situations. These are: compilation, review and audit. Each successive level requires a greater amount of testing and analysis and is consequently more expensive.

A compilation is useful to small, privately held entities that need help in preparing their financial statements. A review, on the other hand, may be adequate for entities that must report their financial positions to third parties, such as creditors or regulatory agencies. Reviewed financial statements may also be useful to business owners who are not actively involved in managing their companies.

An audit is the third and most extensive service. An audit is appropriate for entities that must offer a higher level of assurance to outside parties. An unqualified opinion from a CPA after an audit provides reasonable assurance to outside parties that the entity’s financial statements fairly present its financial position and results of operation in accordance with certain accounting principles.

Following is a more detailed distinction between these three types of services:

A compilation involves assembling financial data from an agency’s own accounting records and presenting it in the form of financial statements. During a compilation, the data is simply arranged into conventional financial statement form. Through compilation services, a CPA prepares monthly, quarterly, or annual financial statements. However, because no qualified person outside the organization has evaluated the data, the CPA offers no assurance as to whether material, or significant, changes are necessary for the statements to be in conformity with generally accepted accounting principles, the cash basis, or the income tax basis of accounting. While a compilation is very useful in setting and evaluating internal goals, funders place little reliance in it as proof that “all is well” with a program. If a business needs to provide some degree of assurance that its financial statements are reliable, it may be necessary to engage a CPA to perform a review or an audit.

A review goes into somewhat greater detail. It includes an evaluation of the program’s financial statements based on questions asked of management, various analytical procedures and comparisons to similar agencies. The scope of a review is less than an audit but it does provide what is known as “limited assurance” that nothing serious came to the CPA’s attention. As part of a review, accountants sometimes suggest changes in the way financial information is presented to bring statements closer to Generally Accepted Accounting Principles. A review done by a CPA provides closer scrutiny of agency finances than a compilation but it still falls short of the level of assurance required by many major funders.

An audit is the highest level of service which a CPA typically provides. It involves a critical review of management (and often directors, as well) and independent verification of selected pieces of financial information. An audit represents an independent, professional opinion from a CPA confirming the accuracy of the financial statements and any conclusions drawn from them. An audit offers an independent assessment of the agency’s operations. It provides what is known as the “highest level of assurance” about the reliability of the agency’s financial statements. An audit sometimes includes specific suggestions for changes in the way the agency is operated, either to bring it closer to the way similar organizations are run or to enhance internal controls. With the current emphasis on accountability in the nonprofit sector, funders are requiring audits with increasing frequency.