ggopher posted on November 10, 2009 10:39
One of the most common questions we are asked is "do we have to have an annual audit?". It's not surprising this is frequently asked since an audit costs $10,000 or more and many nonprofits simply can't afford this expense. This question often arises because many grantmakers ask for an audit in their application guidelines. As you might guess, there is no simple answer to the annual audit question.
Here's the first standard to check: If your nonprofit spends $500,000 or more in federal contract dollars during the fiscal year, then the organization must have a 'single audit' to test for compliance with the management standards (http://www.whitehouse.gov/omb/circulars/a133/a133.html). Beyond that, there are no federal requirements.
But hold the phone! Your state attorney general may have a standard for an annual audit. And of course, these standards vary state by state. So contact the attorney general office for your state or ask your accountant or knowledgable board member to track down the information for your state. An audit may also be required if you solicit funds in a particular state, even if you are not located there!
If you're not spending more than $500,000 in federal funding, or are required to have an audit based on your fundraising activity, what's next? As mentioned previously, grantmakers sometimes request an audit as part of the application process. Foundations do realize that a smaller organization might not be able to afford an audit, so they may accept your Form 990. Contact the program officer or grant contact person to inquire if that substitution is acceptable.
What if you want to know if you're on the right track, but can't afford the price of an audit? A CPA firm can also do a financial statement review, which is about half the price of an audit. A review is a report based on some document review and discussion with the staff and board. The CPA will give some assurance that the financial statements presented were prepared according to generally accepted accounting principals, but unlike an audit, this assurance is not the official auditors opinion (expert judgement regarding the financials). In either case (review or audit), fraud may not be detected. A determined employee or volunteer can devise ways to embezzle funds that the auditor may not find during their limited review of your documents. If you suspect fraud or embezzlement, do not ask for an general audit and assume that your concerns will be addressed. You must let your CPA know that you suspect fraud and ask that they investigate that specifically.
If your organization is not required to have a state or federal audit, you should have an internally guided threshold for an audit. If your nonprofit has an operating budget of $300,000, you should strongly consider an annual review as a minimum. Once you reach a $500,000 operating budget, you should have an annual audit. Your donors will certainly appreciate your proactive stance and assurance regarding the integrity of the accounting and tracking of their donations.