In many states, larger nonprofits (in terms of annual income) must prepare and submit an audited financial statement for their initial charitable registration and then file a new audited statement each year. In other states, the audit statement is only required for years after the initial registration, and is filed with the annual renewal of the registration or separately.
A nonprofit audited financial statement is a detailed report prepared by a certified public accountant. The CPA is an independent professional hired and paid by your nonprofit. The CPA will do an independent investigation to test the accuracy of your nonprofit’s accounting records and internal controls. At the conclusion of the audit, the CPA issues a report in the form of a letter stating whether, in his or her professional judgment, your accounting records and year-end financial statements fairly represent your nonprofit’s financial position according to generally accepted accounting principles (GAAP). The auditor’s letter is attached to the front of your financial statements—these include its balance sheet, statement of support, revenue, expenses, and statement of functional expenses broken into program, management, and general categories. A clean bill of health from a CPA shows the world that your nonprofit is keeping its books in a responsible manner.
Obtaining an audited financial statement from a CPA is usually an arduous and expensive process for a nonprofit—they cost at least $4,000 to $10,000 (or more).
Smaller nonprofits are exempt from these requirements. Instead of filing an audited financial statement, in most states, they can satisfy the annual financial reporting requirement by simply providing a copy of the organization’s completed and filed IRS Form 990 or 990-EZ for the prior year (the IRS does not require the filing of audited financial statements with these information returns).
The rules as to whether and when an independent audit is required for state nonprofit registration and/or renewal vary from state to state. In Massachusetts, for example, an audited financial statement is required if a nonprofit has gross annual revenues of $500,000 or more, while in Georgia, they are required for nonprofits with annual revenue of over $1 million. West Virginia has a particularly low audit threshold of $200,000 in charitable contributions, excluding government and private foundation grants.
Even if an audited statement is not required by state law, your nonprofit might be required to obtain one under federal law. Although the IRS does not require nonprofits to obtain audits, other federal government agencies do. For example, the federal Office of Management and Budget (OMB) requires any nonprofit that spends $750,000 or more in federal funds in a year (whether directly or by passing the money on to other nonprofits) to obtain what is termed a “single audit” to test for compliance with federal grants management standards. (This requirement is explained in OMB Circular No. A-133l.)
In addition, some funders, such as foundations, will not provide funding to a nonprofit unless they receive audited financial statements. The same holds true for many banks and other potential lenders.
For a complete guide to the fundraising registration process, including information on how to do it own your own, refer to Nonprofit Fundraising Registration: Nolo’s State-by-State Digital Guide (updated quarterly).