Q: How often should a 501(c) 3 with a budget of less than $60,000 get an external audit?

 

A:  There is so much talk about accountability, audits and audit committees today. It seems like every organization should be getting external audits on a regular basis. But should they? Need they?

In truth, even the regulatory bodies disagree – at least about the amount that should trigger an audit. The Wise Giving Alliance, for instance, recommends $250,000, while the Panel on the Nonprofit Sector suggests $1 million. About a third of the states have stepped into the gap to define this number for organizations that raise money from their residents, so you might want to begin by calling the department that handles nonprofit affairs in your state and ask if they can give you guidance. Of course, organizations that receive $500,000 or more in a single year in direct or pass-through federal funds must get an audit.

I think it’s valuable to offer a note of clarification here, as well. The trigger points are based on the level of contributions – or grants – an organization receives, not on its budget. For many organizations, the level of contributions will be less than the annual budget. Though, this may not be the case in an organization with strong planned or endowment giving.

Obviously, the organization you are writing about falls well below any of the trigger points we have mentioned. While, it never hurts to get an audit to demonstrate to the public that the organization’s funds are being handled wisely, as you probably know, audits are very expensive today. In all likelihood, the cost would be prohibitive for a small organization like yours.

In speaking with a CPA that does a significant amount of nonprofit work, I was told that pursuing an audit, or even a review, for an organization this size would be both unnecessary and imprudent. It would be unnecessary because the number of transactions is probably relatively small and easy to verify, imprudent because an audit would – and a review could – end up costing a hefty portion of your entire budget.

Instead, you might consider getting a compilation. While a compilation does not certify the process, it does ensure that an extra pair of eyes is looking at your numbers. Of course, you should have standard procedures in place for handling all money. If there are any questions about these procedures or how they are being implemented, people need to push for answers that satisfy them. If it is merely a case that someone on your board, or perhaps a donor, is pushing for an audit, you might see if that person is willing to underwrite the cost.

 

COMMENTS

“While I agree with you that an organization with a $60,000.00 budget might not need an audit, one of the problems with small not-for-profits, is often times the monies are not used wisely and sometimes they are used improperly. Therefore, I strongly believe right from the beginning when a not-for-profit is formed, a CPA or the appropriate person should be involved.  In addition, all not-for-profits should be monitored regularly to make sure monies are used properly, invested wisely, etc..”

Beverly Bachrach
Vice President of University Advancement
St. Thomas University