Most Board members are not expected to be nonprofit financial experts, but they should have a basic understanding of the information in the financial statements that is presented to them. Having a basic understanding will help them better govern a nonprofit and allow them to better understand an organization’s financial position, cash flows, and results of operations. This is important, as it is the role of the Board to ensure that the organization’s funds are used prudently and that the organization is fiscally sound enough to fulfill its mission. By having better fiscal insight, Board members are better able to read and interpret financial reporting, and ask the necessary questions of the organization’s internal fiscal staff as well as the external auditors.
To have a basic understanding of the financial statements, a Board member should be familiar with the common components of financial statements:
- Statement of financial position (balance sheet)
- Statement of activities (profit and loss)
- Statement of functional expenses (required for some health and welfare organizations)
- Statement of cash flows
The Independent Auditors’ Report is shown before the financial statements. This report provides the period under audit, the responsibility of the auditor and management for the audit of the financial statements, and the auditors’ opinion.