What is an independent audit and when does your nonprofit need one?

January 17, 2019 | Jessica Futch

 

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By Jessica Futch, CPA

Although not required for all nonprofit organizations, there are a few circumstances that may trigger the need for an independent audit. An independent audit is an examination of a nonprofit’s financial records, business transactions and practices, and internal controls by a licensed certified public accountant. There is a misconception that audits are required by the Internal Revenue Service (IRS) which is not correct. However, there are some government agencies that do require an audit to be conducted by an independent CPA. Below are some circumstances to help you determine if your organization needs an independent audit.

Federal Law

The Office of Management and Budget (OMB) requires any nonprofit organization that expends $750,000 or more in federal funds in a year to receive a “single audit” to test for compliance with federal grants management standards. Federal funds may be paid to the nonprofit directly from a federal agency or passed through a state or local government whom received the funds from the federal government. Also, the $750,000 threshold can still be met even if the funds received were passed to another nonprofit.

State Law

State law audit requirements vary from state to state and are not required by all states. A little more than half of the states require nonprofits to submit audited financial statements when registering the organization. In most cases, audited financial statements are required to be submitted annually when a nonprofit renews its charitable registration. 

An audit requirement can also be triggered by the total revenue or contributions that a nonprofit receives. The threshold for revenue or contributions received varies from state to state. For example, in Tennessee, a nonprofit with gross annual revenue over $500,000 (excluding grants from government agencies and 501(c)(3) private foundation) must submit audited financial statements. Some states require audited financial statements to be submitted in the state that you solicit funds even if you do not reside in that state. 

Certain state government contracts may also require an audit to be conducted. 

Grants

There are also circumstances when an audit is not required for federal or state requirements, but may be necessary to obtain grants or other funding. Some foundations or funding agencies (including government agencies) may require that an organization include audited financial statements along with the grant proposal/application or conduct an audit to become eligible to receive funding.

Banks

Banks may require an independent audit as a condition of issuing a loan.

In some cases, an audit can be mandated by the nonprofit’s bylaws or at the request of the board of directors/trustees. The board may appoint a group of people to form an Audit Committee which is responsible for selecting an auditor, overseeing the audit process, and communicating audit results.

The benefit

Nonprofits can choose to have a voluntary independent audit even if the circumstances listed above do not trigger the need for one. Independent audits can provide donors and potential donors with the assurance that the nonprofit’s financial practices meet generally accepted accounting principles, the financial statements are accurate, and that funds are being managed properly. Smaller nonprofits that do not meet the requirements, but still want to the transparency benefits of an audit may opt for more cost-effective alternative such as a review or compilation.

If you have any questions about whether your nonprofit needs an audit, please contact one of our nonprofit experts.

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