Your Nonprofit Library Second Shelf – The Nine Threshold Points for a Nonprofit Fiscal Audit

This posting, Your Nonprofit Library Second Shelf – The Nine Threshold Points for a Nonprofit Fiscal Audit, is a part of an ongoing series about nonprofit organizations considering formal independent audits.

When must a nonprofit tax exempt 501 (c) (3) organization have a formal audit by an outside independent auditor? Audits are not required for all nonprofit tax exempt 501 (c) (3) organizations. Smaller organizations with revenue less than $25,000 can perform an internal annual audit. Groups with revenue in excess of $50,000 should be considering hiring an auditor each year. For smaller organizations the changes to the IRS Form 990 may be helpful enough to ask funders and others if filing the most recent Form 990 or 990-EZ or 990-N will suffice as a substitute for an audit.

Independent audits help show the board and the community that appropriate fiscal steps are being taken and that the group is accountable to those supporting it.

There are at least nine threshold points that can lead to an audit:

1. The board of trustees/directors decides to have a formal audit by an independent auditor. The board is the responsible fiscal authority of the organization and can require an audit as it wishes.

2. The new CEO/Executive Director requests a formal audit by an independent auditor from the board as a condition of accepting the position after discussions with the board, and reviewing financial and administrative records.

3. The state may require an audit when a charity hires a professional fundraiser who solicits contributions for the organization for a fee. Check your state law or talk to an attorney familiar with nonprofit law in your state.

4. If your organization is fundraising in states other than its home state, the other state may require a formal independent audit as a condition for raising funds. The trigger point for an audit may be the amount of funds raised in that state. Check the state law in each state you plan to do fundraising before the drive begins. You may have to seek legal assistance for this in other states. States may also require registration for a professional fundraiser.

5. The state may also require an independent audit when the organization has a certain amount of revenue in a year or in a fiscal year. It could be any amount, but some states have set the threshold at $250,000 annual revenue but it can be more or less. Check your state law or talk to an attorney familiar with nonprofit law in your state.

6. A grant, contract or funder may require as a condition of funding that an independent audit be filed each year of the funding. The organization should include the cost of that audit or a fair share of that audit as part of the grant budget in the application.

7. The Federal Office of Management and Budgets Circular No. A-133 requires an independent single audit for those organizations that receive $500,000 or more in federal grants. Section 105: Auditor means an auditor that is a public accountant or a Federal, State or local government audit organization, which meets the general standards specified in generally accepted government auditing standards (GAGAS). The term auditor does not include internal auditors of non-profit organizations. Subpart B: Audit required. Non-Federal entities that expend $300,000 ($500,000 for fiscal years ending after December 31, 2003) or more in a year in Federal awards shall have a single or program-specific audit conducted for that year in accordance with the provisions of this part.

http://www.whitehouse.gov/omb/circulars/a133/a133.html

8. An immediately previous audit found significant deficiencies and material weakness in the operation of the organization. The subsequent audit will show whether the organization has corrected the deficiencies and weaknesses, has accepted and enacted the recommendations of the auditor and become more fully accountable fiscally and in the management of fiscal elements.
9. When two or more nonprofit organizations begin to talk about merging or acquisition aka "take over" (yes, there are nonprofit take overs), one discussion point should be that each will have a formal independent audit prior to finalizing the merger or acquisition. The financial due diligence may not require a full independent audit in all mergers but what form the due diligence will take should include the consideration of a full independent audit. Due diligence is the process of investigation of a business, individual or organization and includes fiscal as well as other considerations, property ownership, potential for legal action for instance.

Resources

For the links to state offices that regulate charities, charitable solicitations and nonprofit organizations see the National Association of State Charity Officials for all states - http://www.nasconet.org/agencies

For a list of the states that require registration for fundraisers see the Multi-State Filer Project, The Unified Registration Statement:

Home Page - http://www.multistatefiling.org/

States that will accept the Unified Registration Statement - http://www.multistatefiling.org/#yes_states and

States that require registration but will not accept the Unified Registration Statement - http://www.multistatefiling.org/#no_states

Strengthening Transparency, Governance, Accountability of Charitable Organizations, A Final Report to Congress and the Nonprofit Sector June 2005 by the Panel on the Nonprofit Sector recommends a threshold of $1 Million total annual revenue for an independent audit. For smaller organizations with at least $250,000 and under $1 million in total annual revenues, a financial statement review by an independent accountant offers a less expensive option while still providing the board, regulators, and the public with some assurance of the accuracy of the organization’s financial records. -

http://www.nonprofitpanel.org/report/final/panel_final_report.pdf

Statement on Auditing Standards (SAS) No.112, Communicating Internal Control Related Matters Identified in an Audit from the American Institute of Certified Public Accountants and the resources listed there –

http://www.aicpa.org/download/members/div/auditstd/AU-00325.PDF and

http://ebpaqc.aicpa.org/Resources/General+Accounting+and+Auditing/New+Auditing+Standards/SAS+No.+112.htm
The Better Business Bureau aka “Wise Giving Alliance” states this standard:
Make available to all, on request, complete annual financial statements prepared in accordance with generally accepted accounting principles. When total annual gross income exceeds $250,000, these statements should be audited in accordance with generally accepted auditing standards. For charities whose annual gross income is less than $250,000, a review by a certified public accountant is sufficient to meet this standard. For charities whose annual gross income is less than $100,000, an internally produced, complete financial statement is sufficient to meet this standard.

http://us.bbb.org/WWWRoot/SitePage.aspx?site=113&id=4dd040fd-08af-4dd2-aaa0-dcd66c1a17fc

Nine Steps to Prevent Merger Failure by Gerald Adolph, Karla Elrod, and J. Neely, HBS Working Knowledge, http://hbswk.hbs.edu/archive/5271.html

Previous postings in this “Nonprofit Audit” series are

Your Nonprofit Library Second Shelf - A Sample Nonprofit Audit RFP

Your Nonprofit Library Second Shelf - Request for Audit Proposals (RFP)

Your Nonprofit Library Second Shelf – Considering An Audit