Does Your Nonprofit Need an Annual Audit?

5.31.24

I’m frequently asked the question as to whether a nonprofit needs an annual audit, and the answer is that it depends. Although there’s no federal requirement for all tax-exempt organizations to have an audit, there are many possible triggers that could make an audit necessary. Some state charitable registrations require organizations over a certain size to have an audit. For instance, the New York State Charities Bureau requires 7A only or DUAL filers to submit an audit if your organization receives total revenue and support greater than $1,000,000. If your organization receives total revenue and support greater than $250,000 and up to $1,000,000, a review report is required. There are exemptions that can be found in the instructions for the NYS CHAR 500. Receiving federal or state funds over certain thresholds can also trigger audit requirements. Even some foundation grants or loan agreements may have audit requirements. It’s important to understand your organization’s specific circumstances to determine whether you are required to have an audit performed.

What are the benefits of an annual audit?

It is worth noting that many organizations choose to conduct an audit, even when not required by an outside body, to demonstrate good financial stewardship and transparency. A financial statement audit provides management, including those charged with governance, and other financial statement users with an independent CPA’s opinion about whether the financial statements fairly present the entity’s financial position, changes in net assets and cash flows in conformity with generally accepted accounting principles (GAAP). In order for auditors to express their opinion, they must perform certain procedures in accordance with generally accepted auditing standards (GAAS). Among other requirements, GAAS requires auditors to plan and perform their audit to obtain reasonable assurance (which is a high, but not absolute, level of assurance) that the financial statements are free of material misstatement, whether caused by error or fraud.

Byproducts of an audit may include some or all of the following:

Training and Assistance: Some organizations, particularly smaller ones, may benefit from periodic assistance with their accounting processes and the drafting of financial statements. Auditors may provide these services while maintaining their independence, as long as they don’t make management decisions. In many cases, an audit is a time when the entity’s financial staff receives a great deal of training and assistance.

Identification of Control Weaknesses and Recommendations for Improvements in Control and Operation: The auditor may identify weaknesses in an entity’s internal control over financial reporting as a result of the procedures performed during the audit and is required to communicate these weaknesses. Additionally, although not required, an audit may involve an assessment of operations and controls that enables the auditor to provide insights to the board and management. This helps the board and management understand risks, evaluate their internal controls and establish procedures to safeguard assets and to improve financial reporting in the future. Ultimately, all of these actions help the organization govern and operate more effectively and efficiently.

Reduced Cost of Capital: Better, transparent and more reliable financial reporting not only reduces the cost of capital in the traditional sense, such as lower interest rates on borrowings, but it also likely increases the nonprofit’s ability to raise contributions. For example, many donors will not even consider contributing to a not-for-profit organization if it does not make available audited financial statements.

My organization is very small and has never had an audit. However, I believe that we could benefit from having a CPA look over our records. Are there alternatives to an audit?

Yes. Some alternatives to having an audit performed that you may wish to consider are a review, compilation or agreed-upon procedures. A review is less in scope than an audit and generally costs about 40-50% of what an annual financial audit would cost. Another option is a compilation; however, compilation engagements do not provide a basis for obtaining or providing any assurance regarding the financial statements. The level of service needed from a CPA is often a function of the needs of the financial statement users and could include agreed-upon procedures over specific risk areas identified by the Board of Directors.

What do board members need to know about Form 990?

IRS Form 990 is an informational return that most nonprofit organizations are required to file annually. It is a public document and serves as the primary source of information regarding the organization’s finances, operations, executives, fundraising efforts, etc. Form 990 should be reviewed annually by the board (or a subcommittee thereof) BEFORE it is filed with the IRS. Board members should fully understand and verify the information in the form and should feel comfortable asking questions until they are satisfied. A good industry practice is to post the public inspection copy of the filed Form 990 on the organization’s website.

Are nonprofits required to post financial information on their website?

No. The federal government does not require nonprofit organizations to provide financial information on their website. The IRS does, however, require NPOs to make their Form 990 publicly available, but they do not specify the method for doing so. In the interest of transparency, it is considered a good industry practice for nonprofits to post their Form 990 and annual financial statements on their website.

Are not-for-profit organizations allowed to make a profit?

ABSOLUTELY! In fact, a modest surplus or increase in net assets is a good goal for most nonprofit organizations. A positive change in net assets allows organizations to build up reserves, which aids with their long-term financial sustainability. The term “not-for-profit” comes from the fact that not-for-profit organizations exist for the benefit of the public and have no owners. Rather than distributing surpluses to shareholders or owners as is done in for-profit organizations, nonprofits must use funds to carry out the purpose for which they were created.

Contributing author: Peggy J. Rowe, CPA, CFE, is an audit partner at Dannible & McKee, LLP. Peggy has over 34 years of experience overseeing audit, accounting and consulting services, specializing in nonprofit organizations. If you have questions about the financial reporting for your nonprofit organization, contact Peggy at prowe@dmcpas.com