Key topics covered in this article: 

  • Nonprofit boards can choose between audits, reviews, and compilations based on their organization’s financial assurance needs, with audits offering the highest level of assurance and compilations the least.
  • Federal, state, and grant requirements often dictate whether an audit is mandatory, with recent federal changes raising the Single Audit threshold to $1 million in federal expenditures.
  • Reviews can be a cost-effective alternative for smaller nonprofits, providing meaningful financial assurance without the higher costs of an audit.

 

Nonprofit board members bring energy and excitement to their roles. However, they may not be as familiar with the financial oversight requirements of their organizations. Many nonprofit boards assume they will need an audit, but that’s not always the case. In some situations, a review can provide the right level of assurance at a fraction of the cost. There is also a third option, a compilation, which organizes financial statements but does not provide independent assurance.

Understanding the differences between audits, reviews, and compilations helps the board choose the level of assurance the organization truly needs to support its mission and meet its requirements.

Three Levels of Services (Audit, Review, Compilation)

Nonprofit financial statement services from independent CPAs come in three varieties, each offering a different level of assurance at a different price point.

Audit: An audit is the highest, most in-depth level of assurance. An independent CPA examines financial records, reviews internal controls, and assesses compliance with Generally Accepted Accounting Principles (GAAP). Then the auditor issues a report with their findings. Audits offer the most thorough examination and carry the highest cost.

Review: A review is the middle option, with limited assurance provided. An independent CPA performs inquiry and analytics to determine whether the financial statements appear reasonable. There is no extensive testing. Based on this work, the CPA states whether they’re aware of any material modifications the financial statements need to conform to GAAP. Reviews typically cost much less than audits and require less time from staff and board members.

Compilation: A compilation is the most basic engagement. An accountant assembles financial statements from information the organization provides but performs no verification or analysis. The accountant gives no opinion on whether the statements comply with GAAP. Compilations cost the least but provide no independent assurance. For these reasons, many nonprofits forgo this option if regulators and compliance requirements do not mandate assurance services.

Understanding the Requirements

How does a board know which option to choose? The first step is understanding what’s actually required. Mandatory requirements come from three primary sources: federal regulations, state law, and grant agreements.

Federal requirements: Recent federal changes bring welcome relief for some nonprofits. The Single Audit threshold increased to $1 million in federal expenditures, effective for fiscal years beginning October 1, 2024. Previously, the threshold was $750,000. That means nonprofits that spend between $750,000 and $1 million in federal funds no longer need a Single Audit. Depending on other requirements, these organizations can choose a less expensive review instead.

Organizations that expend $1 million or more in federal funds during a fiscal year still must obtain a Single Audit. This applies whether the organization receives federal funds directly or passes them through to other nonprofits. The key is tracking federal funds spent during the year, not just revenue received.

State requirements: Some states require nonprofits above certain revenue thresholds to obtain audits. These thresholds vary by state. For example:

  • Maryland requires audits for nonprofits with $750,000 or more in charitable contributions.
  • Virginia requires reviews at $750,000 in revenue and may require audits at $1.5 million.
  • North Carolina does not set a general audit threshold for charitable solicitation, though state grant funds can trigger a Yellow Book audit at $1 million.

Because requirements differ so dramatically from state to state, boards should check regulations in every state where their organization is registered and solicits funds.

Grant and funder requirements: Many foundations, grantmakers, and lending institutions require audited financial statements before providing funding. But many funders, particularly those providing smaller grants, accept reviews. Board members will want to check each funding agreement carefully rather than assuming all funders require audits.

Additional Considerations

If the nonprofit meets certain requirements, the board must plan for an audit. In this case, the board will want to hire an independent auditor, confirm the scope, and make sure the organization has all of the proper documentation available. Many nonprofit boards form an audit committee to oversee the process and implement any recommendations resulting from the audit.

When audits aren’t required, reviews often suffice. For many smaller and mid-sized nonprofits, reviews provide meaningful financial assurance while preserving limited resources. Reviews are particularly appropriate when funders accept them, when audit costs represent a disproportionate share of the budget, or when the organization is building toward audit readiness but isn’t quite there yet.

Some organizations choose audits even when not required. Nonprofits with major donors or large membership bases often find that audits enhance credibility. Organizations like GuideStar use audited financial statements when determining nonprofit ratings, which can boost an organization’s reputation. An audit may also benefit rapidly growing organizations, partially because an audit offers a robust internal controls assessment. This type of in-depth look at fraud prevention measures like segregation of duties and system access can be especially important for smaller nonprofits with less formal oversight. The question becomes whether these benefits justify the additional cost.

Note: Form 990 is separate from the audit, review, and compilation process. Most tax-exempt organizations must file it annually with the IRS. It does not provide any level of assurance on financial statements.

Next Steps

  • Calculate federal expenditures for the current fiscal year to determine whether the organization falls above or below the $1 million Single Audit threshold.
  • Look into state requirements; they may differ from the federal requirements.
  • Review all grant agreements for specific language about financial statement requirements.
  • Consult with advisors who specialize in nonprofit financial reporting; start the conversation several months before the fiscal year ends for adequate preparation time.

Looking Ahead

Nonprofit board members often have more flexibility in financial assurance decisions than they realize. Yes, audits are often required, especially for larger organizations; however, many nonprofits can meet their obligations with a more limited and cost-effective engagement, leaving more resources available for mission-critical programs. For more information on audits and reviews in the nonprofit sector, contact PBMares Not-for-Profit Partner Bo Garner.