I’m frequently asked the question as to whether a nonprofit needs an annual audit and the answer is, it depends. Although there is no Federal requirement that all tax-exempt organizations have an audit, there are many possible triggers that can cause an organization to require an audit. 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 $750,000 ($1,000,000 in 2021). If your organization receives total revenue and support greater than $250,000 and up to $750,000 ($1,000,000 in 2021), a review report is required to be submitted. There are exemptions which can be found in the instructions to 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 is important to understand the specific circumstances of your organization 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 have 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 present fairly 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 entities, 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 operations: The auditor may become aware of 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. Also, though not required, an audit may bring an evaluation of operations and controls that enables the auditor to provide input to the board and management. This helps the board and management understand risks, evaluate their internal control and establish procedures to safeguard assets and to improve financial reporting in the future. All of these ultimately help the entity 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 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, in contrast, 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 the primary source of information regarding the finances, operations, executives, fundraising efforts, etc. of the organization. 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 990 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. However, the IRS does 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 such organizations to build up reserves, which aids 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.
Peggy J. Rowe, CPA, CFE, CBA, is an audit partner with Dannible & McKee, LLP, a certified public accounting firm with offices in Syracuse, Albany and Binghamton, New York. If you have questions about the financial reporting for your nonprofit organization, contact Peggy at email@example.com or visit us online at www.dmcpas.com.
To learn more nonprofit industry insights, register for Dannible & McKee’s Virtual Nonprofit Conference on January 13, 2021, at: www.dmcpas.com/events.