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Blog > Which States Require Nonprofit Audits?

Which States Require Nonprofit Audits?

Devi Narayanan
January 29, 2024
4 minutes

Nonprofit organizations operate under special regulations that differ from traditional businesses. One key difference is the audit requirements that nonprofits must adhere to in order to maintain their tax-exempt status. While some states require all registered nonprofits to undergo annual audits, other states only mandate audits under certain circumstances. This can make compliance confusing for nonprofits that operate in multiple states.

In this post, we will provide a state-wise comparison of nonprofit audit requirements so you can ensure your organization stays compliant no matter where it operates.

States That Require Audits for All Nonprofits

Seven states—California, Hawaii, Illinois, Maine, New York, West Virginia, and Rhode Island—require all registered nonprofits to undergo an annual audit, regardless of their revenue. This stringent policy aims to ensure proper oversight and financial accountability of organizations benefitting from tax exemptions.

In California, nonprofits must submit audited financial statements for gross revenues over $2 million. For revenues below $2 million, a financial review is permitted instead of a full audit. Illinois follows a similar sliding scale policy based on revenues.

States That Require Audits Above a Revenue Threshold

The majority of states only require nonprofits to undergo audits if their gross revenues exceed a specified threshold, which differs by state. Common revenue triggers range from $250,000 to $1 million. For example:

  • Florida: $500,000
  • Texas: $750,000
  • Michigan: $750,000
  • Virginia: $750,000
  • Pennsylvania: $750,000

Some states have lower thresholds, such as Mississippi ($250,000), Tennessee ($500,000), and Massachusetts ($500,000). Others have higher triggers, like Ohio ($1 million) and Georgia ($1 million). Nonprofits should research their state’s specific revenue audit trigger to ensure compliance.

States With Multiple Revenue Triggers

Rather than a single revenue threshold, some states have tiered audit requirements based on multiple revenue ranges. For instance:

  • In Arizona, nonprofits with over $500,000 in revenue must undergo a financial review, while organizations with over $1 million in revenue must have a full independent audit.
  • Missouri nonprofits need an independent review above $275,000 in revenues, and a full independent audit above $500,000.
  • Kansas has triggers at $500,000 (review) and $750,000 (audit).

Having clearly defined tiers helps scale oversight appropriately for larger nonprofits while reducing burden for smaller organizations.

States With No Audit Requirements

A handful of states—Alaska, Idaho, New Hampshire, New Jersey, and Wyoming—have no statutory nonprofit audit requirements. However, some nonprofits may still choose to undergo voluntary audits to reassure donors and grantors. Lenders and insurance providers may also require audited financials.

Additionally, nonprofit organizations with federal contracts exceeding $750,000 are subject to federal audit rules per the Single Audit Act. Any nonprofit receiving substantial federal funding would need to comply regardless of their state’s policies.

Explanation of the Federal Requirements for Nonprofit Audits

Single Audit Act: This is the cornerstone of federal audit requirements for nonprofits. It applies to entities that expend $750,000 or more in federal funds in a year. This audit is more comprehensive than a regular financial audit, as it includes an examination of the nonprofit’s financial records, compliance with federal regulations, and the effectiveness of its internal controls.

Audit Scope and Standards:

  • Financial Statements: The audit includes a review of the nonprofit’s financial statements to ensure they are accurate and comply with generally accepted accounting principles (GAAP).
  • Federal Program Compliance: Auditors also assess the nonprofit’s adherence to specific federal program requirements. This is crucial because federal funds are often earmarked for particular purposes.
  • Internal Controls: The audit evaluates the effectiveness of the organization’s internal controls over federal programs to prevent misuse of funds.

Audit Report: The result of the audit is a report that includes the auditor’s findings on the financial statements, compliance, and internal controls. This report is crucial for the continued funding and regulatory compliance of the nonprofit.

Follow-up Actions: If issues or non-compliance are found, the nonprofit must take corrective actions. Continued non-compliance can lead to penalties, including the loss of federal funding.

Overview of Circumstances Where Federally Funded Nonprofits Must Have Audits

Exceeding the Expenditure Threshold: 

The primary trigger for a federal audit under the Single Audit Act is when a nonprofit spends $750,000 or more in federal funds in a fiscal year. This includes direct federal funding or pass-through funds received from another entity.

Types of Federal Awards:

  • Grants: Direct financial contributions from federal agencies.
  • Contracts: Payments for services the nonprofit provides to or for the federal government.
  • Subsidies: Financial assistance for specific programs or initiatives.

Program-Specific Audits: 

In some cases, if a nonprofit receives funding from only one federal program, it may only need a program-specific audit rather than a full single audit.

Ongoing Compliance Requirements: 

Receiving federal funds typically involves adhering to ongoing reporting and compliance requirements, even beyond the audit. This can include regular financial reporting, program performance reporting, and adherence to specific federal regulations applicable to the funding received.

Understanding these federal audit requirements is crucial for nonprofits to ensure compliance, maintain their integrity, and secure ongoing federal funding. These audits not only serve as a financial check but also help in assessing the effectiveness and lawful use of federal funds.

Steps Nonprofits Can Take to be Prepared for an Audit

1. Maintain Accurate Financial Records:

  • Ensure all financial transactions are properly recorded and categorized.
  • Regularly reconcile bank statements with book entries.

2. Understand Compliance Requirements:

  • Stay informed about federal, state, and grant-specific audit requirements.
  • Ensure understanding of applicable accounting standards, such as GAAP.

3. Implement Strong Internal Controls:

  • Establish policies for financial management and fraud prevention.
  • Regular reviews and updates to these controls are crucial.

4. Document Policies and Procedures:

  • Have clear, written documentation of all organizational procedures and policies.
  • Ensure staff are trained and adhere to these procedures.

5. Conduct Internal Reviews:

  • Periodically review financial and operational processes internally.
  • Address any discrepancies or issues immediately.

6. Prepare Necessary Documentation:

  • Organize financial statements, tax returns, grant agreements, and other relevant documents.
  • Have ready access to these documents for auditors.

7. Engage with Auditors Early:

  • Establish communication with auditors well before the audit begins.
  • Understand their expectations and prepare accordingly.

8. Educate Staff and Board Members:

  • Ensure that key personnel are aware of the audit process.
  • Board members should understand their role in governance and oversight.

9. Review Previous Audits:

  • Analyze findings from previous audits and ensure corrective actions were implemented.

10. Budget for the Audit:

  • Ensure that there are resources allocated for the audit process.

Role of GRC Software in Audit Preparation

1. Automated Record Keeping and Reporting:

  • GRC software helps in maintaining accurate and up-to-date financial records.
  • Facilitates easy generation of reports needed for audits.

2. Compliance Management:

  • Helps in tracking and ensuring compliance with various regulatory requirements.
  • Alerts organizations to changes in relevant laws and standards.

3. Risk Assessment Tools:

  • Assists in identifying and managing risks that could impact financial reporting.
  • Enables a proactive approach to mitigating potential audit issues.

4. Internal Controls Management:

  • Streamlines the process of establishing and monitoring internal controls.
  • Provides a centralized platform for documenting and testing these controls.

5. Document Management:

  • Centralizes important documents, making them easily accessible during audits.
  • Ensures proper documentation of policies and procedures.

6. Audit Trail and Transparency:

  • Offers an audit trail feature, providing transparency in all financial transactions.
  • Helps in demonstrating accountability and governance standards to auditors.

Frequently Asked Questions

  • What types of audits do nonprofits need to undergo?

    Nonprofits generally must have an independent financial statement audit conducted by a CPA. This evaluates the organization’s financial records, internal controls, compliance, and financial health. Some states permit compilations or reviews for smaller nonprofits. Single audits are required for those receiving substantial federal funds.

  • When are nonprofit audits due?

    Most states require nonprofit audits to be filed along with the Form 990 within 4 to 6 months after the organization’s fiscal year ends. For calendar year filers, this is usually May 15th. Some states have earlier or later due dates. Nonprofits should check with their state regulators.

  • What happens if a nonprofit doesn’t get an audit when required?

    Consequences vary by state but often include fines, loss of tax exemptions or fundraising privileges, and even potential dissolution of the nonprofit corporation. Criminal penalties may apply in cases of deliberate noncompliance or fraud. It’s crucial for nonprofits to understand and meet their audit obligations.

  • Do nonprofit branches/chapters need separate audits?

    Generally, only the central parent nonprofit entity needs an audit. Subsidiaries, branches, or chapters that are under the umbrella of the same 501c3 group exemption do not require separate audits. However, some states may require consolidated audits or set rules for subordinate organizations. Check with local counsel.

Key Takeaways

  • 7 states require mandatory audits for all registered nonprofits.
  • Most states tie audit requirements to revenue size, with thresholds ranging from $250,000 to $1 million.
  • Some states use tiered models based on multiple revenue triggers.
  • A few states have no statutory audit requirements but audits may still be advised.
  • Federal requirements may apply to nonprofits with significant federal contracts.

Proper oversight protects the integrity of the nonprofit sector. Organizations should periodically review their state’s nonprofit audit compliance regulations as they grow and expand. Using a solution like VComply can help automate monitoring of financial metrics and required filings. Don’t leave anything to chance – make sure your nonprofit has its audit obligations covered. With the right compliance software, staying on top of state rules is simple.