Rising costs are no longer a background issue for associations. Each day, association leaders see vendor contracts escalate, payroll budgets stretch, and program expenses outpace initial expectations and projections.

Inflation impacts operations long before it appears in the audit. By the time we, as auditors, review your financial statements, those pressures are already embedded in the numbers.

Auditors understand that inflation affects everyone, but we need to see how your association responded. That means clear decisions, reasonable assumptions, and documentation that explains why results differ from what was initially expected.

Your association shouldn’t plan for perfection. Instead, the best approach is to focus on clarity, consistency, and confidence in the financial story your statements tell. Let’s dive into how inflation shows up in association audits, the specific questions we auditors ask, and what boards can do now to reduce friction later.

How Inflation Actually Shows Up in an Association Audit

Inflation rarely appears as a single line item. Instead, we see it run through multiple areas of the audit.

As auditors, we often notice it first through unexpected variances: expenses exceed budget, certain cost categories grow faster than historical patterns, and cash balances decline sooner than anticipated.

From there, we focus on context. We want to understand whether changes reflect temporary pressures or long-term shifts in your cost structure. Just as important, we look for evidence that leadership identified those pressures and responded deliberately.

Common audit touchpoints include:

• Expense trends compared to prior years
• Budget-to-actual variances
• Reserve usage and liquidity changes
• Updates to forecasts and financial assumptions

Inflation itself is not an audit problem, but missing context can be.

Budget Overruns vs. Board-Approved Assumptions

One of the earliest places inflation surfaces is in budget overruns.

Auditors do not expect budgets to anticipate inflation perfectly, but we do expect alignment between actual results and the assumptions approved by the board.

When expenses exceed budget, auditors typically ask:

• What assumptions supported the original budget?
• When did management recognize those assumptions no longer held?
• How did management respond to the changes?
• How quickly was the board made award of the budget overruns?
• Was the board given context for the overruns?

A midyear increase in insurance premiums or vendor costs, may fully explain an overrun. That explanation becomes much stronger when your documented board minutes and/or board memos reflect discussion, acknowledgment, and context around why the shift occurred.

Many nonprofit and association boards are volunteer-led. Some members may bring strong business experience, but many may be less familiar with an association’s unique business model. What auditors need most is evidence that the board not only saw and approved the numbers, but they also understood the underlying cause and accepted the revised reality.

Silence in the minutes creates uncertainty, even when decisions are sound.

Expense Classification and Consistency Under Cost Pressure

Inflation often forces associations to rethink how costs are structured. Staff responsibilities shift, vendors replace internal functions, and one-time costs begin to recur.

Examples that often draw scrutiny include:

• External service contracts replacing payroll expenses
• Inflation-driven increases treated as extraordinary items

None of these changes are inherently wrong. Instead, we see issues arise when classifications change without explanation or approval.

Consistency supports comparability. When changes occur, documenting the rationale protects the integrity of the financial statements.

Pressure on Reserves and the Liquidity Story

It is no surprise that rising costs frequently place pressure on reserves.

While associations may draw on savings to sustain programs, retain staff, or absorb short-term cost spikes, it is important to understand that auditors pay close attention to how and why reserves are used.

We typically ask:

• Was reserve usage planned or reactive?
• Did the board approve the use of reserves?
• How does leadership assess reserve sustainability?

These questions connect directly to liquidity disclosures and your broader financial narrative. Again, it’s our job as auditors to look for alignment between the numbers and intent.

Months of Operating Expenses Vs. Net Asset Without Restrictions at Year End

One benchmark we often review when evaluating reserves is months of operating expenses covered by net assets without donor (or member) restrictions. This measure shows how long your association could continue operating if revenue slows or stops.

For example, if annual expenses are $1.2 million and year-end net assets without restrictions total $300,000, that equals about three months of operating reserves ($300,000 ÷ $1,200,000 × 12 months = 3 months). This is a good spot for this organization to be.

Generally, we like to see associations have at least three months of operating coverage at year-end as a starting point. That level typically provides a reasonable cushion. More is stronger, and less is not automatically a red flag (again, context matters), but it does require clear discussion about revenue stability, cash flow, and long-term sustainability.

A clear liquidity story reassures readers that leadership understands both current pressures and future obligations.

Why “Everyone Is Dealing With Inflation” Is Not Enough

Inflation may be widespread, but audit documentation must be specific.

As auditors, we cannot rely on general economic conditions as evidence. We need to understand how inflation affected your association in particular.

Statements such as “costs increased due to inflation” invite follow-up questions: Which costs? By how much? Over what period? What actions followed?

Strong explanations connect broader economic pressure to your specific operational decisions. They demonstrate awareness, responsiveness, and governance oversight.

Specificity transforms a common challenge into a credible financial narrative. In addition, specificity assists us auditors in benchmarking the association against competitors and/or peers, providing an opportunity for us to suggest improvements or changes to address challenges.

Variance Explanations Auditors Expect to See

Variance analysis becomes more critical during inflationary periods, and auditors expect management to explain material differences between budgeted and actual results. These explanations should be consistent with internal reporting and supported in writing.

Effective variance explanations usually include:

• The original assumption
• What changed and when
• The financial impact
• Any related board discussion or approval

These explanations don’t need to be technical. Clear, plain language is more effective.

When explanations exist only verbally, audit clarity suffers. Documentation and written support strengthens confidence in management oversight.

Going Concern Awareness Without Alarm

Inflation can raise sustainability questions, but auditors approach this area with care.

Going concern considerations focus on whether the association can meet obligations over the next year. They do not require a crisis to be relevant.

Auditors may ask:

• Has inflation materially affected cash flow?
• Are there plans to offset rising costs?
• Do forecasts support continued operations?

Clear planning and realistic projections often resolve these questions quickly. The goal is awareness, not alarm.

Documented discussions demonstrate that leadership is actively monitoring financial health.

Opt for Plain Language Disclosures

Disclosures often expand during periods of economic uncertainty. Auditors will look for disclosures that explain financial pressures in language readers can understand. This may include liquidity notes, risk discussions, or subsequent events.

Effective disclosures:

• Use plain language
• Reflect actual conditions
• Avoid unnecessary technical detail

Overly generic disclosures may prompt auditors to request revisions. On the other hand, specific, thoughtful wording supports transparency and trust.

Board Minutes as Audit Support

Board minutes often become key audit evidence.

They show that leadership discussed rising costs, evaluated options, and made informed decisions. Auditors often review minutes to confirm approval of budgets, reserve usage, and strategic responses.

Strong minutes typically include:

• Acknowledgment of rising costs
• Discussion of alternatives
• Approval of revised plans or assumptions

Minutes do not need to capture every detail, but they need to demonstrate awareness and intent.

Well-prepared minutes reduce follow-up questions and contribute to a smoother audit.

Looking ahead

Inflation continues to reshape how associations operate. It also changes how we, as auditors, interpret the story behind the numbers.

Auditors understand rising costs, and what we look for is evidence of thoughtful leadership, clear communication, and documented decisions. When boards and management align on assumptions and document their responses, audits become more efficient and less stressful.

If inflation is changing your cost structure, now is the time to think about how that story appears in your audit. Clear explanations today reduce uncertainty tomorrow. Reach out to our association advisors to learn more about how we can help.