Are Nonprofit Organizations Required to have a Financial Statement Audit?

Charitable donations remain one of the most significant sources of revenue for many nonprofit organizations throughout the United States. Without the generous support of donors, many charitable organizations would be unable to fulfill the purpose for which they are designed. It is imperative that charitable organizations remain transparent and act as good stewards of the funds that donors have committed to help the organization further its mission.

One way a charitable organization may provide accountability to donors is by undergoing an annual independent financial statement audit, but are all charitable organizations required to do this?

What is an independent financial statement audit?

A financial statement audit is a professional service that is performed by an independent certified public accounting firm and encompasses an independent review of an organization’s accounting practices and policies which includes examining evidence to support the amounts and disclosures that are reported in an organization’s financial statements. Upon conclusion of a financial statement audit, the audit firm will issue an opinion concluding on the fair presentation of the organization’s financial statements, including the policies used to prepare the financial statements.

Is a financial statement required?

There is no legal or regulatory requirement that all charitable organizations undergo a financial statement audit each year, however, many do so for a variety of reasons. Some common reasons why a charitable organization may be required to have a financial statement audit include:

• State law, depending on the level of charitable funding
• Requirement of funding source (i.e. grantor agency)
• To comply with the Single Audit Act
• To comply with the terms of bank loans

Pennsylvania State Law

The Pennsylvania Solicitation of Funds for Charitable Purposes Act, 10 P. S. § 162.1 et seq., requires organizations soliciting charitable contributions from Pennsylvania residents to register with the Bureau of Charitable Organizations. While some types of organizations are excluded from having to register, the vast majority are not. To register, a charitable organization must file, annually, a Form BCO-10. In addition to the BCO-10, the charitable organization must also include a copy of its IRS Form 990 and an applicable financial statement. Which financial statement must be submitted will vary based on the level of contributions received during year fiscal year:

Contribution Level	Type of Financial Statement Required
$25,000 – $100,000	Internally Prepared, Compiled, Reviewed, or Audited
$100,000 – $250,000	Compiled, Reviewed, or Audited
$250,000 – $750,000	Reviewed or Audited
$750,000 or more	Audited

 

This table shows that any charitable organization that receives more than $750,000 in ‘gross annual contributions’ from the public is required, by state law, to undergo a financial statement audit. Note that any proceeds from special fundraising events are included in the calculation of gross annual contributions, while support received from governmental agencies is excluded from the calculation.

As charitable organizations near the end of their fiscal year, it is imperative that contribution levels are analyzed to ensure the organization prepares the appropriate financial statement to remain compliant with state law. If a financial statement audit is required, here are some best practices for preparing for the audit.

Funding Sources

Many charitable organizations rely on grants from other nonprofit organizations, private foundations, or government agencies. Often, a grantor organization will require that the grantee submit audited financial statements to the grantor agency. Charitable organizations should analyze and fully comprehend all requirements of grant agreements before accepting the grant.

Single Audit Act

The Single Audit Act requires an annual audit of non-federal entities that expend $750,000 or more of Federal Financial Assistance (i.e. federally funded programs). A single audit encompasses not only an audit of an organization’s financial statement, but also a more thorough examination of an organization’s activities and controls surrounding its spending of federal funds.

Compliance with Bank Loans

Similar to a for-profit business, banks often lend funds to charitable organizations for a variety of reasons (capital improvements, purchase of real estate, working capital lines of credit). One of the ways a bank protects itself is to require the charitable organization to submit audited financial statements on an annual basis. If a charitable organization is looking to take out a new loan, be sure to understand the terms and requirements of the loan agreement.

Final Thoughts

While not every charitable organization is required to have an annual audit, there are many good reasons to do so. In addition to the required scenarios discussed above, presenting audited financial statements to prospective donors provides transparency and assurance that a charitable organization has sound financial practices and policies in place to be good stewards of its funds. To read more about transparency and donor relationships review our recent blog post.

If you have questions about the information outlined above, please contact us; our seasoned and experienced nonprofit professionals are here to help. You can also learn more about our nonprofit services by visiting our Nonprofit industry page.

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