1. Audited financials provide assurance that you have an actual bookkeeping system, have properly and honestly entered data, and have approved financial controls in place. That helps to reassure granting agencies that you will use their funds properly.
2. Audits are not cheap. If you can afford annual audited financials, you are more likely to be financially solvent and organized enough to meet other grantor criteria.
3. Financial statements give the grantor an idea of your organizational costs vs. program costs.
4. Financials provide a rough idea of what other types of income you are receiving. No grantor wants to see that grants are the sole source of support for your nonprofit.
5. Grantors or any other donor should use due diligence, (verify that your agency is a financially solid and effective agency) to decide if you are a safe place to invest their funds. Organized granting agencies, be they government or private, are required to do due diligence. Audited financials are part of that due diligence.
Many of the questions I get also ask why their in-house bookkeeper or an accountant on the board can't do the audit. The purpose of the audit is quite simply, to be sure you are telling the truth, the whole truth and nothing but the truth regarding your financial position, to ensure that you have financial control procedures in place, and that those controls are actually used. Therefore, audited financials must be done by an accountant who is removed from the day-to-day operation of your agency to provide objectivity.
The financial statements also provide the input to decide if you should be filing the long form 990, or the so-called postcard (actually an online form) format. It makes filing the 990 much easier. The accountant that does the audit can also file the 990, although there is usually a separate charge for doing so.
Very rarely, some granting agencies will accept an accountant's review letter for a comparatively new nonprofit that is less than three years old. This also has to be done by an outside accountant or accounting firm and requires much of the same raw data from you.
Audits typically take from two to three months to complete for most agencies, although ones for large nonprofits can take much longer. This isn't a case of picking up the phone and hiring a firm to produce audited financials in a week. As soon as you close your current fiscal year books, you should plan on starting the audit. If you don't have a formal bookkeeping procedure, most firms will not even bid on the job. And by all means check the firm or individual's qualifications. You definitely want someone who has done nonprofit audits before.
When requested by the grantor, audited financials are not optional. If you don't have them, you will not be funded, and that may be the reason you can best understand about necessity for the process.