Nonprofit boards should review financial statements for accuracy, completeness, net assets with donor restrictions, cash flow, budget performance, and signs of financial risk before approval, when applicable. Reviewing financial statements is an important part of the board’s responsibility to understand how resources are managed and whether the organization can support its mission.
For nonprofits that need more formal financial oversight, EWA provides nonprofit audit services to help organizations improve transparency, reporting confidence, and audit readiness. Reviewing financial statements carefully before approval can also help boards identify questions early, instead of waiting until year-end or audit fieldwork.
Start With the Big Picture
Board members should first review whether the financial statements clearly show the organization’s overall financial position. This includes assets, liabilities, net assets, revenue, expenses, and cash flow.
A board does not need every member to be an accountant, but each member should understand whether the nonprofit is financially stable, whether programs are sustainable, and whether the organization is meeting its budget expectations. If the statements are difficult to understand, leadership should provide a summary that explains the most important changes.
This high-level review helps the board ask better questions. For example, a surplus may look positive, but it may include net assets with donor restrictions that are not available for general operations. A deficit may look concerning, but it may reflect planned program investments or timing differences in grant funding.
Review Revenue Sources and Funding Concentration
Boards should review where revenue is coming from and whether the nonprofit is too dependent on one source. Revenue concentration can create risk if a major grant, donor, contract, or program fee changes unexpectedly.
Important revenue questions include:
- Did total revenue increase or decrease compared with budget?
- Are any major grants or donations restricted?
- Is the organization depending too heavily on one funder?
- Are significant contributions, pledges, grants, contracts, and other revenue properly recorded and classified?
- Are there timing differences that explain major revenue changes?
California charitable organizations subject to the state’s Nonprofit Integrity Act generally must obtain an independent annual audit when they accrue $2 million or more in gross revenue in a fiscal year. Certain government grants are excluded from the $2 million threshold when the nonprofit is required to provide an accounting of how the grant funds were used. Audited financial statements must be made available for inspection by the California Attorney General and the public no later than nine months after the close of the fiscal year. See the California Attorney General’s audit requirements for additional context.
Look Closely at Expenses and Budget Variances
Boards should compare actual expenses against the approved budget before approving financial statements. Large variances should be explained clearly, especially when they affect programs, staffing, fundraising, or administrative costs.
Not every variance is a problem. Some differences happen because grant funding is delayed, program activity changes, hiring timelines shift, or certain expenses occur at specific points during the year. However, unexplained variances can make it difficult for the board to understand financial performance.
A good board packet should highlight the most important budget differences. This helps board members focus on the items that need attention instead of reviewing every line item without context.
Review Net Assets With and Without Donor Restrictions
Boards should review net assets with donor restrictions and net assets without donor restrictions because resources are not all available for the same purposes. Donor restrictions may limit the use of resources to a specific program, time period, purpose, or campaign.
This matters because an organization may appear financially strong while having limited cash and other liquid resources available for general operations such as payroll, rent, or daily expenses. The board should understand which resources are available for general use and which are subject to donor restrictions and therefore require specific tracking and reporting.
Tracking donor restrictions is also important for audit readiness. Clear documentation helps support how resources were received, classified, used, and released from donor restrictions. EWA’s financial statement preparation services can help organizations present financial information clearly and consistently.
Financial Statement Review Checklist for Nonprofit Boards
| Area to Review | What the Board Should Ask |
| Revenue | Are revenue sources stable, diversified, and properly recorded? |
| Expenses | Are expenses aligned with the approved budget and mission priorities? |
| Net assets with donor restrictions | Are donor restrictions tracked and reported clearly? |
| Cash flow | Does the organization have enough cash for near-term obligations? |
| Budget variances | Are major differences explained in plain language? |
| Liabilities | Are payables, debt, and obligations clearly reported? |
| Internal controls | Are approvals, reconciliations, and oversight procedures working? |
| Audit readiness | Are records organized for CPA review or audit fieldwork? |
Review Cash Flow and Liquidity
Board members should review cash flow because a nonprofit can show positive revenue and still face short-term cash pressure. Timing matters, especially when grants are reimbursed after expenses are paid.
Useful cash flow questions include whether the nonprofit has enough cash to cover payroll, vendor payments, rent, insurance, and upcoming program costs. The board should also review whether the organization has an operating reserve or a plan to handle delayed funding.
Cash flow review is especially important for nonprofits with seasonal fundraising, government contracts, or major events. Leadership should explain whether cash changes are temporary, expected, or signs of a deeper issue.
Ask About Internal Controls and Oversight
Boards should ask whether internal controls are strong enough to reduce errors, fraud risk, and reporting problems. Internal controls include approval processes, bank reconciliations, expense review, segregation of duties, and board oversight.
Smaller nonprofits may not have large accounting teams, but they can still create practical checks and balances. For example, one person may prepare a payment, another may approve it, and a board member or executive may review monthly bank reconciliations.
For additional guidance on board responsibilities, oversight, and effective nonprofit governance, download EWA’s Nonprofit Governance Guide for practical considerations nonprofit boards can use to strengthen their governance practices.
Internal controls also support trust. As EWA explains in its article on how nonprofits can improve member engagement and renewals, strong communication and accountability help build confidence with stakeholders. Financial oversight is part of that same trust-building process.
Make Sure the Board Understands the Reports
Financial statements should be presented in a way that helps board members make informed decisions. If the reports are too technical, leadership should provide a short-written explanation, dashboard, or summary.
A useful board financial packet may include a statement of financial position, statement of activities, budget-to-actual report, cash flow summary, and notes about major changes. The goal is not to overwhelm the board. The goal is to help members understand what changed, why it changed, and what action may be needed.
When board members approve financial statements without understanding them, they miss an opportunity to strengthen governance. Good questions can reveal issues early and help leadership make better decisions.
Final Thoughts
Reviewing and, when applicable, approving financial statements should be a thoughtful governance step, not a quick vote. Nonprofit boards should review revenue, expenses, net assets with donor restrictions, cash flow, budget variances, liabilities, and internal controls before approval.
Ernst Wintter & Associates LLP helps nonprofits improve financial reporting, prepare for audits, and strengthen board confidence. With the right review process, financial statements become more than compliance documents. They become a practical tool for protecting the organization’s mission.
Need help strengthening your nonprofit’s financial reporting or preparing for an upcoming audit? Contact Ernst Wintter & Associates LLP to learn how our nonprofit accounting and audit services can help your organization move forward with confidence.
