When Does a Nonprofit Need an Audit?

A nonprofit audit is an independent examination of an organization’s financial records, internal controls, and adherence to legal and ethical standards. This process assesses the nonprofit’s financial health, ensures compliance with regulations, and provides objective assurance that financial statements are accurate and comply with generally accepted accounting principles (GAAP). External scrutiny helps identify errors and offers insights for operational improvements.

State and Local Regulatory Mandates

State laws frequently dictate when a nonprofit must undergo an audit, with requirements often tied to annual revenue thresholds. These thresholds vary across states, but a common range that triggers an audit is between $300,000 and $500,000 in annual revenue. Some states may require a full audit for higher revenue levels, such as $1,000,000 or $2,000,000, while others may mandate a financial review for lower thresholds. Nonprofits must consult their specific state’s regulations, often administered by the state’s charity registration office or the Attorney General’s office, to determine their exact obligations.

A financial review differs from a full audit in scope and assurance. An audit offers high assurance, involving extensive testing of financial data, internal controls, and transactions to express an opinion on financial statement fairness. A review provides limited assurance, relying on inquiries and analytical procedures without in-depth verification. Reviews are less expensive and time-consuming than audits, making them suitable for smaller nonprofits or those not legally required to undergo a full audit but seeking external validation. Failure to comply with state financial reporting requirements, including reviews or audits, could result in penalties or the inability to solicit funds.

Federal Funding Requirements

Nonprofit organizations receiving substantial federal financial assistance are subject to specific audit requirements outlined in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, commonly known as Uniform Guidance or 2 CFR Part 200. A “Single Audit” is generally required when a non-federal entity, including a nonprofit, expends $750,000 or more in federal awards during its fiscal year. This threshold is increasing to $1,000,000 for fiscal years beginning on or after October 1, 2024.

This requirement applies to both direct federal awards and subawards passed through other organizations. The Single Audit provides assurance to the federal government regarding the proper management and use of public funds. It examines the organization’s financial statements, internal controls over compliance, and adherence to federal program requirements, ensuring accountability and appropriate utilization of federal funds.

Grantor, Donor, and Lender Stipulations

Beyond regulatory mandates, private entities often impose audit requirements as conditions for funding or financing. Private grantors, such as foundations or corporations, frequently include audit clauses in their grant agreements, particularly for significant grant amounts. These stipulations ensure the grantee’s financial accountability and proper use of funds, serving as contractual obligations.

Individual major donors may also request an audit as a condition of their substantial contributions. This provides donors with confidence that their funds are managed responsibly and transparently. An audited financial statement offers an objective assessment of the nonprofit’s financial health, which can reassure large contributors.

Financial institutions, including banks, commonly require annual audits as part of loan covenants when providing financing to nonprofits. For instance, if a nonprofit secures a loan for facility expansion, the lender typically uses audited financial statements to assess the organization’s financial stability, repayment capacity, and overall risk. These requirements are essential for maintaining compliance with the terms of the debt.

Internal Governance and Stakeholder Expectations

Even without external mandates, a nonprofit’s board of directors may voluntarily commission an audit. This proactive decision enhances financial transparency, demonstrates good stewardship, and provides greater assurance to stakeholders. An independent audit serves as a valuable tool for the board to assess the organization’s financial health and internal control effectiveness.

An audit can significantly bolster trust with potential donors, the general public, and community partners. By undergoing an independent review, a nonprofit signals its commitment to accountability, which can attract new support and strengthen existing relationships. Organizations seeking substantial public support or planning significant growth often find that an audit provides the credibility needed.

For growing organizations, or those contemplating strategic changes like mergers, an audit can be a prudent measure for due diligence. It offers an in-depth financial health assessment, identifying potential risks or areas for improvement before major decisions are made. This internal decision-making, driven by the desire for robust financial oversight and stakeholder confidence, is a compelling reason for a nonprofit to pursue an audit.