How Often Do Nonprofits Get Audited?

Nonprofit organizations, which serve various community needs, often face financial audits to ensure transparency and accountability. An audit, in this context, is an independent examination of an organization’s financial records and statements. These examinations are important for maintaining public trust and demonstrating responsible stewardship of donated funds and other resources.

Factors Determining Audit Frequency

The frequency with which a nonprofit undergoes an audit is influenced by several factors, primarily related to its financial activity and funding sources. Many states and the Internal Revenue Service (IRS) establish specific annual revenue thresholds that, if surpassed, mandate an independent financial audit. These thresholds vary by state, often ranging from $200,000 to $1,000,000 in gross revenue or contributions.

Federal funding also plays a significant role. Nonprofits expending $750,000 or more in federal awards during their fiscal year are required to undergo a “Single Audit” under the Uniform Guidance (2 CFR Part 200). This requirement is annual once the expenditure threshold is met.

Beyond federal and state mandates, grantor requirements can necessitate audits. Private foundations, corporate donors, or other grant-making entities frequently include audit clauses as a condition for receiving substantial funding. These requirements may apply regardless of whether the nonprofit meets other statutory thresholds. An organization’s own internal governance, such as its bylaws or board resolutions, might also mandate regular audits as a best practice for financial oversight and to enhance donor confidence.

Types of Audits Nonprofits Encounter

Nonprofits may face several types of audits, each with a distinct scope and purpose. The most common is the financial statement audit, which evaluates the accuracy and fairness of the nonprofit’s financial statements in accordance with Generally Accepted Accounting Principles (GAAP). This audit determines if financial records present a true view of the organization’s financial position.

A Single Audit, also known as a Uniform Guidance Audit, is for organizations that expend federal awards above the established threshold. This audit examines the nonprofit’s financial statements and assesses compliance with federal program requirements. It is distinct from a standard financial statement audit due to its emphasis on federal award compliance.

Compliance audits examine whether an organization adheres to particular laws, regulations, or terms of agreements. This includes adherence to tax-exempt status rules, donor restrictions, or grant agreement terms. Grantor-specific audits are initiated by a funding entity to verify funds were utilized as intended and all stipulations were met.

The IRS can also conduct audits. An IRS audit focuses on a nonprofit’s tax-exempt status, unrelated business income, or other tax-related matters. These audits ensure the organization continues to meet its tax-exempt designation requirements and properly reports any taxable income.

The Audit Process

When a nonprofit undergoes an audit, the process follows a structured series of steps. It begins with a formal notification from the auditing firm, followed by an engagement letter that outlines the scope, objectives, and timeline of the audit. This initial phase establishes the framework for the examination.

During the planning phase, auditors understand the nonprofit’s operations, internal control systems, and assess potential financial risks. This involves reviewing organizational documents and gaining insight into how transactions are processed and recorded. Auditors develop a detailed plan for their fieldwork based on this understanding.

The main phase of the audit is fieldwork, which involves the comprehensive review of financial records, transactions, and internal control systems. Auditors request documents such as bank statements, invoices, payroll records, board minutes, and grant agreements to verify financial data. They may also interview staff members to gain further insight into financial processes and operations.

Following fieldwork, auditors analyze their findings and prepare an audit report. This report includes the nonprofit’s financial statements, an opinion on their fairness, and any identified deficiencies in internal controls or non-compliance issues. Findings are communicated through a management letter, providing recommendations for improvement. The audit culminates with the presentation of the report to the nonprofit’s board or audit committee, who then consider and implement the recommendations.

Triggers for Specific Scrutiny

Beyond routine audits based on financial thresholds, certain situations can trigger heightened scrutiny or an audit initiated by regulatory bodies or funders. Whistleblower complaints are a trigger, where individuals report suspected financial impropriety, fraud, or mismanagement. These reports can lead to investigations or audits by authorities such as a state Attorney General’s office or the IRS.

Significant financial irregularities can also prompt an audit. Unusual fluctuations in revenue or expenses, unexplained financial losses, substantial transactions with related parties, or consistent operating deficits may raise red flags. These anomalies suggest potential issues that warrant a closer look at the organization’s financial health and practices.

Negative media attention or increased public scrutiny regarding a nonprofit’s finances or operations can lead to an audit. Widespread public questioning or adverse publicity can compel regulators or funders to initiate an examination to address concerns and ensure accountability.

Changes in leadership or significant operational shifts can also increase scrutiny. Non-compliance with required annual filings, such as the IRS Form 990, or significant errors within these filings, can trigger an inquiry or audit by the IRS. The IRS uses data analytics to identify inconsistencies or incomplete information in these forms, which can lead to further examination.