Issue:

Should a qualified opinion by an independent certified public accountant on financial statements affect the acceptance of an applicant to ECFA or the continued membership of a current member? Are there any exceptions permitted and how should this issue be addressed with applicants or members?

History:

Historically ECFA has accepted some financial statements with qualified opinions. This has been done on a case-by-case basis, based on the nature of the exception. Standard 3 requires an audit which is in accordance with auditing standards generally accepted in the United States of America (GAAS) with financial statements To the extent that ECFA has been able to determine that the qualification does not "materially affect" the presentation of the statements, it has allowed qualifications.

Examples:

1. Incomplete contributions verification (not done through direct confirmation with donors

2. Incomplete or missing year-end physical inventory of materials

3. Unvalidated property and equipment carrying amount

4. Inadequate loss/bad debt provision

5. Unrecognized gifts-in-kind revenue

6. Unverifiable accounts receivable

7. Inadequate retirement benefit reserve

8. Inadequate pension footnote information

9. Presentation of revenue recognition/change in revenue recognition

10. Uncombined or unaudited related entities

11. Cash basis reporting

12. Inadequate internal control over cash receipts

Conclusions:

1. ECFA believes it is not practical to produce a list of “acceptable” qualifications. Each qualification may contain different degrees of severity and may affect the fair presentation of the financial statements differently.

2. Financial statements prepared on the cash basis of accounting are not in accordance with generally accepted accounting principles and thus are not acceptable.  If the difference between cash and accrual (GAAP) basis financial statements is not material, the member should expect that the independent certified public accountant will issue a GAAP basis report. 
   
   If the difference is material, the financial statements should be revised accordingly.

3. ECFA maintains that obtaining an unqualified opinion is important and that members should work with their certified public accountants to obtain an unqualified opinion.

   1. Many times the independent certified public accountant can remove the qualification if some action is taken by the organization.  Each organization should attempt to rectify the situation causing the qualification before the opinion is finalized.

   2. Many exceptions to a qualified opinion appear to be immaterial to the overall financial statement presentation.  The organization should attempt to discern materiality of a qualification and urge the auditor to remove the qualification when it is not material.

   3. Where appropriate, the organization should encourage the independent certified public accountant to use alternative testing methods to gain assurance and remove the qualification.

   4. In cases where there is an immaterial difference between the reports of an organization on cash basis versus accrual basis, the independent certified public accountant should be urged to issue an accrual-based opinion on the financial statements.

4. ECFA expects organizations to obtain an unqualified GAAS/GAAP opinion.  If an organization chooses not to remove a qualified opinion which could be removed, it cannot expect ECFA to look favorably on that qualified opinion.

5. All qualified reports prepared by independent certified public accountants will be subject to greater disclosure.  ECFA may need additional details from the certified public accountant regarding the nature and severity of the exception before it can consider the application or approve an Annual Membership Renewal.  If, after receiving these materials, ECFA believes there is no material misstatement or risk of misinterpretation, then ECFA may accept the financial statements.

6. ECFA believes that organizations with a "Going Concern" are at greater risk of violating ECFA Standards 4 and 7.2.  The concern is that there may be unrealistic expectations on the part of the donors with regard to what their unrestricted donations will accomplish.  Contributions used to solve past problems rather than to fund current ministry objectives causes a “Going Concern” to be viewed as unfruitful.

ECFA may accept an audit with a current "Going Concern," but will disclose this condition on the ECFA profile.