Independence Issues in Not-for-Profit Audits

David J. Hess, CPA, Jacob C. Peng, PhD, CISA, and Carol S. MacPhail

Attest services rendered to not-for-profit (NFP) entities provide assurance to stakeholders as to the quality of the financial condition, results of operations, and internal controls of the NFP. These assurances are important to the public interest for numerous reasons, including the fact that NFPs often receive contributions from the general public, as well as grants and contracts from other NFPs and government entities. NFPs also represent an important market segment for public accounting firms; many NFPs traditionally have a fiscal year-end that falls outside the profession's traditional busy season. This results in CPA firms being able to schedule the audit work for NFPs in less busy periods, save on overtime costs, and fill their staff schedules with productive work in otherwise slower periods. Notwithstanding this helpful intersection of supply and demand, audits of NFPs can often present some unique—and frequently opaque—independence issues. This article discusses the authoritative guidance on independence, as well as many of the independence issues that may be encountered by CPAs who audit NFPs. It makes a number of observations that may be helpful to CPAs in addressing a potential independence issue before it develops into a problem.