Q&A #143 – Should a nonprofit include the audited financial statement in its annual report?
Question: I am the new CFO for a mid-size nonprofit organization that is growing and having great success with its programs and attracting new funding. I noticed that last year’s annual report promoting the accomplishments of organization includes the audited financial statement to show financial results. Is it recommended to include the audit in the annual report, or should financial information be provided in a different format?
Answer: You can choose to include the audited financial statement in an organization’s annual report provided to members, donors, funders, and the public, but it would not be a wise choice. Audited financial statements, although important, are very long and designed to meet generally accepted accounting principles (GAAP) and other compliance purposes. They do not work as well to “brag” about the organization’s accomplishments.
Most nonprofits use their annual report as a communications and marketing tool to tell their story, listing major efforts, programs, and accomplishments, providing insight into how financial resources were used, and communicating an assessment of financial health.
There is no requirement for nonprofits to issue an annual report, like there is for required annual filings such as the Form 990 and state registrations. Similarly, the annual report is unlike audited financial statements, which are often needed for banking purposes, grant requirements, insurance applications, and meeting loan and lease liquidity obligations, to name a few examples.
Choosing to prepare and issue an annual report is at the sole discretion of each organization unless an annual report requirement is included in an organization’s Bylaws or operational policies. Many organizations choose not to issue annual reports or only issue them occasionally when there is a major milestone event like a 50th anniversary.
Additionally, there is no one general format that is considered an accepted best practice for annual reports. Consequently, most annual reports are unique in appearance and design. Many nonprofits completely alter the format of their annual report each year to better align with and meet changing circumstances, culture, and perceptions.
The main purpose of an annual report is to be a communications and marketing tool. Use the same thought and planning that goes into an elevator pitch or new marketing effort. Avoid lengthy, unnecessary minutiae that causes people to lose interest and distracts from the main objective of the annual report.
When considering the entire footprint of the annual report, reserve only about 5% of the entire content for financial information. To make this tactic work, you will need to condense and summarize financial information in a manner that is similar to a financial dashboard for the Board and finance committee. This will preclude you from including the full audited financial statement as it will be too long.
Planning Tip – When presenting financial information in an annual report, consider displaying revenue and expense information in a graphical pie chart format aligned to the major accomplishments of the organization. For example, revenue categories could be displayed as individual contributions, corporate sponsorships, federal grants, registration fees, and other income, while expense categories could be displayed as community assistance programs, career development training, aid to small businesses, fundraising, and general and management.
To honor transparency and provide the assurance that comes with audited financial statements, include a statement in the annual report such as:
“Financial information included above [or in this annual report] has been excerpted from the organization’s audited financial statement [date]. The complete audited financial statement is available upon request [or can be accessed at the organization’s website].”
This will assure readers that an audit of the financial statement has been completed, while making the financial information included within the annual report easy to read and focused on showcasing accomplishment of the mission and goals of the organization.
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