Since 2018, Sustainable Economies Law Center staff have annually dredged the bottom of our souls seeking enthusiasm about our annual financial audit. We’ve learned to make it enjoyable and easeful in many ways. It helps that we’ve worked with wonderful people – our awesome bookkeepers at the cooperative Wholehearted Bookkeeping, and thoughtful CPAs at Crosby & Kaneda.
Yet, especially after supporting several clients with audit processes, I have heavy questions in the pit of my stomach: Could the audit process do more harm than good? Could audits be an unmerited drain on organizational resources? Could they lend toward a culture of distrust? Could they be disrupting organizations’ missions? Could they be a tool to perpetuate racial bias and white supremacy?
What are audits and why do we get them?
If you aren’t very familiar with audits, watch my 20-minute cartoony workshop: We got an audit! What on earth is an audit?. Here are slides with additional links. And you can even look at our mostly boring audited financial statements.*
In brief, in an audit, an independent accountant goes through your bookkeeping, records, and procedures, then renders an opinion about whether your organization’s financial statements accurately represent the financial situation, according to the generally accepted accounting principles (GAAP).
Audits are supposedly about “integrity.” In fact, it was the Nonprofit Integrity Act in California that made it legally required for any nonprofit with $2 million or more of income. This law passed in reaction to Enron and other companies that committed fraud. Yep, fraud sometimes happens in nonprofits, too. And now it feels like ALL nonprofits are being punished for it, in ways that don’t necessarily foster integrity.
DO audits foster integrity?
Before the Law Center began doing formal audits in 2018, we already had a “built-in audit system,” as our auditors described it. Our worker-directed structure includes a participatory financial management system that has several checks and balances. Here’s a video about the Law Center’s unique approach to distributing financial management. For example, we have one person to receive and deposit checks (Income Squirrel), another person to input them into quickbooks (our bookkeeper), and a third to review the quickbooks entries (Income Bear), along with someone keeping an eye on the big picture of our income and cash flow (Income Eagle). Missing, misappropriated, or mis-categorized income is unlikely to go unnoticed. We also taught ourselves to do our own 990 tax return back in 2014, which we describe in this cartoon. As a result, we felt quite confident in our ability to produce relatively accurate financials and comply with the law.
With that background, I don’t feel audits have added much value to our organization. If anything, I feel audits have been subtly harmful. First, there’s the cost: Last year, we paid our auditor $12,500, paid thousands extra to our bookkeepers during audit months, and committed significant staff time to preparing for the audit. The work of preparation is mostly about re-organizing and reformatting our existing financial statements and records. It’s work we would not otherwise want or need to do. All things considered, I’d estimate that the audit costs us more than $30,000 per year.
So we pay $30,000 per year to produce a 14-page document that, as even our auditor told us, “no one really reads.” If I assign a dollar value to ways I repress my rage about this, the cost would just keep going up: headaches, skin irritation, a rumbling stomach. The Law Center may have grown over the past decade, but we still raise a lot of our money from the grassroots, with hundreds of contributors who give us between $25 and $100 each year. It pains me to spend their money in this way. It does not feel like integrity.
But my feelings and observations about audits get even grimmer when I reflect on how audits might impact organizational culture, specifically to foster an environment of demand and distrust. For us, the requirements of formal audits increased pressure to document everything and do things “correctly.” If a coworker fails to file a contract or receipt in the right place, we have to pester them. The frequency with which we pester each other has greatly increased. I’d rather be asking my coworker how their day has been or how their mom is, rather than asking them where they filed such-and-such contract. It always makes me think of what Lao-Tzu wrote: “If you don't trust people, you make them untrustworthy” (Tao Te Ching). We are constantly demanding of one another to prove ourselves and validate transactions. Further, as a worker self-directed organization, we aim to support coworkers to make their own decisions about what work feels right and good; there is no structure of hierarchy in which one worker tells another what to do. But the growing administrative demands associated with being audited mean we are increasingly pressuring each other to do things because “it’s required.” It means that we do more work now because we have to, not because we want to.
Lastly, I’ve come to see an even darker side of audits, particularly as I’ve seen our clients go through unsettling audit processes. I was so disturbed by this, I wrote this open letter to auditors: Statement Regarding Biased and Harmful Practices in Organizational Audits: How accounting and auditing professionals disrupt solidarity, undermine the commons, and perpetuate white supremacy. Please take time to digest this and consider sharing this with CPAs you know.
First, I’m seeing auditors disrupt the missions of our clients, by failing to grasp the nature of economic relationships our unique clients are creating. Here is an excerpt from the piece:
“Most of the Law Center’s clients are nonprofits and cooperatives working to rebuild the commons, meaning they organize community members to co-steward land, housing, farms, workplaces, solar projects, and other resources for mutual and community benefit. Unlike conventional charities where there are often clear lines of separation between the provider and recipient of charitable aid, our clients fulfill their missions by blurring such boundaries and empowering many people to work together in shaping their economic relationships. They build community wealth and solidarity by creating webs of relationships that reciprocally benefit all involved.
In short, our clients are prompting wealth to flow differently through our communities. And these new wealth flows call upon accountants to question first-glance assumptions about what constitutes assets, income, expenses, or liabilities to an organization.“
Second, rather than taking time to understand our unique clients, I’ve seen auditors cast suspicion on clients in ways that likely disproportionately harm BIPOC- and women-led organizations and that perpetuate white supremacist norms. For example, imagine an auditor threatens to render an adverse opinion on the basis that a BIPOC women-led organization failed to account for the dollar value of using land to tend a garden and host workshops. Here’s another excerpt:
“Some accountants are quick to assume that the land is an in-kind gift to the organization. However, it could be easily turned on its head: The organization is a gift to the land, because of the range of benefits it brings to the land’s people, plants, animals, and surrounding community. [...]
There’s an implicit assumption that black and brown bodies can only take up space if someone else “gives” them access. Whiteness in the U.S. historically equated to a right to take up space, remove others from land, and be an “owner.” Brownness and blackness have historically meant a loss of freedom of movement, loss of land rights, and relegation to a tenant class. White leaders in the nonprofit sector have — literally and figuratively — had many doors opened for them without their accountants asking them to count it as in-kind ‘income.’ The ability to take up space is quietly assumed to be an entitlement or endowment of Whiteness. Meanwhile, our BIPOC clients are being asked to track their own movements in space and account for them as if they are not entitled to be there and as if their presence must be the result of someone else’s charitable ‘gift.’”
All of this leaves me believing that:
- States should repeal mandatory audits for nonprofits,
- Funders should stop asking grantees to provide audited statements,
- The accounting and auditing professions should undertake some learning and reforms to reduce the harms they are causing, and
- The nonprofit sector could develop new best practices for financial integrity, which wouldn’t have to rely on professional accountants or oppressive accounting standards. As I described with what the Law Center did, nonprofits could put in place their own internal review processes, or perhaps get creative in developing peer-review or participatory community audit processes.
*P.S. I said our audited financials are *mostly* boring. The one non-boring part is Note 9 on Page 13, where we took a principled stand against the capitalist values of GAAP, noting that "’fair value’ is founded on an unfair system” and “commodification of labor dehumanizes economies.” Specifically, the Law Center refuses to assign a dollar value to the hours that attorneys volunteer for us, and we feel quite proud to deviate from GAAP in that way. This blog post has been a critique of audits, not a critique of GAAP, but the latter topic could use a thorough treatment. Meanwhile, here’s a 1-minute TikTok where I share a few thoughts on “GAAAAAAAAAAP” (which is how I pronounce it in my head now).