When is a non-profit required to have an audit performed by an independent certified public accountant?

Overview: Non-profit entities are regulated by both federal and state laws. It is important to know what those regulations are and when reporting is required.

Non-profit organizations are required to file a tax return annually with the Internal Revenue Service (IRS) unless they meet the exemption requirements recognized under section 501(c)(3) of Title 26 of the United States Code. Federal regulations also require that when a non-profit entity expends over $750,000 in federal funds during the entity’s fiscal year it must have an audit of the financial statements as well as a single audit of the federal expenditures performed by an independent certified public accountant (CPA).

NONPROFITS INCORPORATED IN THE STATE OF CALIFORNIA:

Depending on the state the non-profit is incorporated in, the state may have regulations and reporting requirements that must be followed. Nonprofits incorporated in the State of California have annual registration and reporting requirements with the Attorney General of California unless they meet the exemption requirements for the RRF-1.

The State of California has specific regulations concerning the operations and audit requirements for non-profit entities that have revenues during the fiscal year equal to or greater than two million dollars.

For example: When a California non-profit has revenues of two million or more in a fiscal year, the non-profit is required to prepare annual financial statements in accordance with generally accepted accounting principles, and have them audited by an independent CPA. The audited financial statements must be submitted to the Attorney General no later than nine months after the close of the fiscal year covered by the financial statements.

IF A NON-PROFIT HAS NO FEDERAL OR STATE REQUIREMENT:

Even if a non-profit has no federal or state requirement to have an audit of its annual financial statements, it may still be required to have an audit due to the type and amount of funds it receives. In fact, many federal, state, and local funding sources will require the non-profit to obtain an audit.

When submitting proposals for a grant or accepting a grant award, the non-profit needs to be sure it performs the necessary due diligence to understand the requirements of the grant award prior to expending the award. Preparing and planning for an audit after the fact can lead to unfavorable results.

NONPROFITS & NON-GOVERNMENTAL FUNDING:

Beyond the legal and contractual requirements, a non-profit might encounter non-governmental funding that will require an audit. As the non-profit grows and its opportunities for greater funding arise, the it should begin looking ahead and planning for the eventuality of an audit.

• Audits typically take 30 or more days to complete.
• If they are not initiated early enough, the nonprofit may find that it is unable to obtain awards it may have otherwise been eligible for if audited financial statements were available.

To ensure that the non-profit entity maintains good standing with the government and grantors, it should utilize information and guidance from industry associations, governmental websites, and publications.

A CPA that specializes in the non-profit industry is an excellent source of information, so non-profits should be sure to partner with their CPA.

Kendra Dockham, CPA Principal
Smith Marion