Nonprofit organizations play an important role in supporting and enriching our communities. In return for providing a public benefit, they receive certain advantages - most notably, exemption from many federal and state taxes. To maintain that status and demonstrate accountability, nonprofits are subject to specific audit and reporting requirements that differ from those of for‑profit entities.
At a high level, an audit is a comprehensive review of an organization’s accounting records and internal controls by an independent CPA. Its purpose is to determine whether the financial statements are presented fairly and accurately in accordance with applicable accounting standards. Beyond regulatory compliance, a well‑executed audit can strengthen donor confidence by showing that funds are handled responsibly and that safeguards are in place to reduce the risk of errors, misstatements, or fraud.
Whether a nonprofit needs an audit depends on several factors, including its location, funding sources, revenues, and internal governance requirements. Below is an overview of the most common circumstances that trigger an audit requirement.
National Requirements
In some countries, audits are mandatory for all nonprofits regardless of size. In the United States, however, the IRS does not require nonprofits to undergo an audit at the federal level. Instead, audit obligations come from state laws, funding sources, or an organization’s own governing documents.
State-Level Requirements
Many U.S. states have their own audit rules for charitable organizations. Some states require audited financial statements before a nonprofit may solicit contributions, while others impose audit thresholds based on annual revenue, government funding, or public support levels. These rules vary widely and are updated periodically, so organizations should review their state’s requirements annually.
For Washington State, per RCW 19.09.541, “Charitable organizations with more than three million dollars in annual gross revenue averaged over the three preceding, completed accounting years must, in addition to the reporting requirements in RCW 19.09.075, obtain an independent, third-party audit of its financial records for the preceding accounting year. This audit report must be made available in paper form to the public upon request or accessible to the public on the internet.”
It should be noted that if a charitable organization has annual gross revenues between one to three million dollars (averaged over three preceding years), their Form 990 (or 990PF, 990EZ, or 990T) must be prepared by a CPA or other “professional who normally prepares such forms in the ordinary course of their business” and made available to the public - and if this form is not prepared by one of these professionals, they must have an audit performed by a CPA.
Donor and Funding Requirements
Major donors, private foundations, and government agencies may require an independent audit as a condition of receiving funds, or continuing to receive funding. These requirements are often outlined in grant agreements or award letters.
For nonprofits receiving federal funds, there is an additional consideration: organizations that expend more than one million dollars in federal awards during a single fiscal year generally must undergo a Single Audit under the Uniform Guidance. These audits follow specific federal requirements outlined in §200.514 (or program‑specific audits under §200.507) and differ in scope and standards from a traditional audit conducted under Generally Accepted Auditing Standards or “GAAS” (similar to for-profit audits).
Board or Internal Policies
Some nonprofits choose to require audits even when they are not legally mandated. A board of directors may adopt these policies as part of their fiduciary oversight responsibilities, or bylaws may specify that annual audits are required. Even when not externally required, an audit can provide valuable insights into internal controls, financial reporting, and operational efficiency.
What Steps Should Organizations Take to Stay in Compliance?
Staying compliant with audit and reporting requirements is much easier when nonprofits build a few key habits into their annual routines. Here is a quick checklist:
1. Review Revenue Thresholds Each Year
Since many audit rules - such as Washington State's revenue-specific rules mentioned above - are based on multi‑year revenue averages, organizations should review their annual totals to determine whether audit requirements apply.
2. Confirm State Filing and Solicitation Requirements
Because states set their own rules regarding when audits are required for charitable solicitation, nonprofits should verify their state’s regulations annually and ensure all registrations and renewals are current.
3. Evaluate Donor and Grant Agreement Conditions
Funding sources may require an audit performed under GAAS, or, in the case of federal expenditures exceeding one million dollars, a Single Audit. Reviewing these terms early helps avoid surprises.
4. Maintain Strong Internal Controls and Accurate Records
Strong accounting practices support accurate reporting, reduce risk, and make audits smoother when required. Regular reconciliations, clear documentation, and appropriate segregation of duties all contribute to compliance.
5. Revisit Board Policies and Governing Documents
Review bylaws and board policies annually to ensure the organization is meeting its own internal obligations.
How Can Sweeney Conrad Be of Service?
If you’re unsure whether your nonprofit organization is subject to audit requirements, or if you simply want greater confidence in your financial reporting, Sweeney Conrad is here to support you. Our team has extensive experience working with nonprofits of all sizes, and we are happy to answer questions or help you determine the best path forward.