September 26, 2024

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Audits and Nonprofit Organizations

Before getting into the details of how charitable solicitation requirements can trigger audit requirements, let us first clarify what these terms mean.

First, if you want to know what charitable solicitation registration requirements mean for faith-based nonprofits, start here.

Second, before discussing the details of audit requirements pursuant to charitable solicitation registration, what is an audit?

“An audit is the examination of the financial report of an organization.”² An audit can be conducted  

    - internally,  

     - externally by a private third party (usually a CPA), or  

     - by a government agency like the Internal Revenue Service (IRS).³  

An internal audit is performed by the organization itself; an external audit is performed by an independent third party; and a government audit is performed by the government agency itself (generally at no cost to the organization, other than time).  

This article focuses on external audits performed by an independent third party. The most likely scenario where the law will require your organization to undergo an external, third-party audit is a state’s charitable solicitation registration law. Read on to find out what this means and how it might affect your organization.  

State-to-State Variance in Audits Related to Charitable Solicitation:

Amongst states that require registration as a condition for nonprofits to solicit or receive donations from donors within their state, most require the nonprofit to register and submit an annual application⁴ to remain authorized to fundraise.⁵ Nonprofits “must individually register with each state where it is required to do so, following that state’s particular requirements” since “[t]here is no single national registration application that works in every state.”⁶ For organizations that fundraise in multiple states, this might get confusing, since the state agency in charge of receiving these filings will vary by state.⁷ However, in most states, organizations required to register will have to fill out an application, submit an annual renewal, provide annual financial information, and pay a registration fee.⁸

Among the states that require registration, some require that the financial information submitted with the renewal application be reviewed or audited by a third-party accountant. These requirements generally have a monetary threshold: reviewed or audited financial statements are only required for organizations that receive annual revenue over a certain amount. In some states with audit requirements, that threshold may be as high as $2 million or as low as $200,000.  

To check whether the states where your organization fundraises have audit requirements, check out Napa Legal’s Faith and Freedom Index.

The Impact of Audits

Both reviews and audits can be expensive, with audits often costing $10,000 or more in auditor fees alone, not to mention the time investment of the organization’s staff and audit committee.  

For example, if a religious organization that received $50,000 per year in donations from a particular state was required to submit reviewed or audited financial statements in that state, the organization may have to spend as much as 20% of its annual donations from that state to pay for an audit. If an organization receives a $10,000 donation from a state with an audit requirement, the compliance cost of receiving that donation may actually be more than the donation itself.

Overall, audit requirements mean that, even if an organization’s strategic plans did not include an annual audit, the organization is now “on the hook” for an annual audit if the organization needs to continue receiving donations or grants from the applicable state. At a certain point, an organization may actually have to consider whether receiving donations from a particular state is worth the burden of a new audit requirement.

Conclusion

Nearly all faith-based nonprofits receive donations, which triggers charitable solicitation registration requirements. Some state registration laws require third-party audits, which can be a costly and time-consuming effect of receiving those donations. Be sure you understand the audit requirements in the states from which you receive donations, so you can make the important decisions and take the steps your organization needs to maintain compliance and to thrive in accomplishing its mission.

Consult Napa Legal’s Multistate Matrix and Faith & Freedom Index to explore the laws of the different states and see how each state ranks on audit requirements and other factors that may affect your organization.

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¹Emma Kate Read is a J.D. Candidate at the University of Notre Dame, originally from Charleston, SC. In addition to her legal studies, she serves as President of the St. Thomas More Society and Executive Notes Editor for the Journal of Emerging Technologies. She worked as a Legal Fellow at Napa Legal Institute for the Summer of 2024, performing legal research and educational writing on issues relevant to faith-based nonprofits. Outside of her academic and professional life, she recently got married, and she enjoys playing tennis and leading Bible studies in her free time.

²What is an audit? - PwC Middle East

³Audit: Meaning in Finance and Accounting and 3 Main Types (investopedia.com)

⁴State Filing Requirements for Nonprofits | National Council of Nonprofits

⁵This registration is different from registering to conduct business in the state and is different from corporate “reports.” State Filing Requirements for Nonprofits | National Council of Nonprofits

⁶Non Profit Organizations: Fundraising Registration and Compliance Guide | Nolo

⁷Generally, it will be managed by department such as, the Attorney General’s Office, the Secretary of State’s Office, the Revenue Department, the Tax Division, etc. Charitable Solicitation Registration: What Is It? Why Is It Important? (jfwaccountingservices.cpa)

⁸Some states exempt certain organizations, such as religious entities or those with revenue below a certain threshold. These exemptions might apply automatically, or the organization might have to file an exemption application.

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