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July 10, 2023 Expert’s Corner

Nonprofits could benefit from new law establishing higher threshold for audits

Mary Kay Curtiss
By Mary Kay Curtiss

For many years, nonprofit organizations in Connecticut have been required to have audits conducted if their annual gross revenues were greater than $500,000.

This relatively low threshold often placed a financial burden on nonprofits, considering the cost of an audit can start as high as $10,000. Many organizations have sought to have the threshold increased to help alleviate some of the administrative and financial burdens audits can create.

However, for nonprofits whose gross revenues hover near the $500,000 mark, it seems there could be some good news coming their way.

The Connecticut General Assembly recently approved a bill raising the audit threshold of annual gross revenues exceeding $500,000 to annual gross revenues exceeding $1 million. If signed into law, this could mean a significant regulatory change for some nonprofits.

And while it will likely come as a welcome new development, organizations will still need to keep a keen eye on how their finances are managed — and have a complete understanding of their particular funding sources, any compliance requirements associated with those funds, and the controls in place around them.

New threshold doesn’t necessarily mean no audit

Even if a nonprofit falls below this new threshold, it may still be required to have an audit if it receives considerable state or federal financial support.

Organizations that expend $300,000 or more in Connecticut state grants, or $750,000 or more in federal grants, may be required to undergo a compliance audit, which accompanies a financial statement audit — collectively, also referred to as a single audit — even if its annual revenue does not exceed $1 million.

Because state and federal grants must be used for designated programs and services, single audits are required to ensure an organization is compliant with grant requirements and that funds are being properly used.

Management and governing bodies should also consider that certain corporate and foundation donors that give substantial donations to nonprofits may require the books be audited by an independent auditor.

These funding sources may look for the audit to evaluate proper and effective use of the contributed funds, or as an independent assessment of the organization’s financial reporting process and overall financial health.

If this is the case, an audit will need to be performed regardless of the gross revenues.

Oversight can be an advantage for fundraising

Regardless of the regulatory changes, management and the governing body of a nonprofit may still want a formal report on the organization’s financial performance as a matter of oversight.

There are options for organizations that do not meet the Connecticut state audit or government single audit requirements. In addition to obtaining an audit, organizations can also engage an independent firm to perform a review of their books and records, likely at a lower cost than a full audit.

A review is less rigorous and provides limited assurance, without opining on the fair presentation of the financial statements, as they would in a full audit.

It is important to note that oversight is still essential for all nonprofits, but especially for smaller organizations that remain susceptible to financial issues, particularly in today’s economic climate.

Smaller nonprofits are increasingly struggling to find private corporate donors. Since the COVID pandemic, there has been a trend in “prioritized giving” among some large corporate and individual donors, and tighter budgets have caused some to make such giving less of a priority moving forward.

With many nonprofits vying for the same shrinking pool of philanthropic dollars, the ones with effective financial controls in place could make themselves more attractive to legacy or even new donors.

Regardless of the threshold spelled out by the new law, this is really about oversight: making sure controls are in place and technology systems are adequate and appropriate for the organization to operate efficiently and effectively, and help generate timely and accurate financial reports for meaningful decision-making.

Combined, these systems could provide answers to key questions: Is the organization prepared for anticipated growth? Does it need to consider rightsizing its programs? Could lack of a formal audit give some funders pause?

Nonprofits should be on top of questions like these when renewing existing funding agreements or seeking new ones.

Mary Kay Curtiss is a principal at accounting and consulting firm CLA in West Hartford.

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