Nonprofits and charitable organizations must conduct independent regular audits and single audits if specific requirements are met. California guidelines call for an independent audit of the financial statements if revenue meets or exceeds $2 million. Federal guidelines were modified in 2013, but still call for a single audit if the expanded threshold is met.
Nonprofit organizations in California must comply with both federal and California guidelines for audit requirements. California’s requirements for charitable organizations are set by the Nonprofit Integrity Act of 2004, which was enacted as a state level response to the Sarbanes-Oxley Act.
California’s Nonprofit Integrity Act of 2004 requires that charitable organizations with gross revenues equal to or greater than $2,000,000 to do the following:
- Establish an audit committee: Members of the audit committee cannot include the staff, CEO or president, or CFO or treasurer of the nonprofit. The committee may contain members that also serve on the organization’s finance committee, if one exists, as long as those members comprise less than 50 percent of the audit committee. Finance committee members are not allowed to serve as the audit committee’s chairperson.
- Determine if executive compensation is “just and reasonable”: The trustees of a nonprofit are required to review and approve executive compensation (including benefits) at the time of hire, term renewal or extension, and modification.
- Make available independently audited annual financial statements: The charitable organization must prepare annual financial statements audited by an independent certified public accountant. The financial statements are required to be made available to the California Attorney General and to the general public within nine months of the fiscal year end of the prepared financial statements.
A single audit (Subpart F Audit) must be conducted if the nonprofit receives federal funds from one or more government funding sources and expends $750,000 or more of the federal funding in one fiscal year. Federal funds may include grants or government contracts and may be received directly from the federal government or from pass-through entities. Pass-through entities may include state and local government agencies.
Single audits are more encompassing than regular independent audits and consist of examining the nonprofit’s financial records, statements, internal controls, received during the period being audited that meets the specific criteria. They are designed to ensure that the federal funds have been appropriately used and reported in the nonprofit’s financial statements.
Nonprofits and charitable organizations must be compliant with both federal and state provisions when receiving federal assistance. In California, this means complying with the Nonprofit Integrity Act of 2004 if gross revenue is $2,000,000 or greater. For federal purposes, this means complying with guidelines under the Single Audit Act of 1984 Uniform Guidance Subpart F, if the organization expends federal funds in excess of $750,000.
Please feel free to contact your L&B professional at 858-558-9200 to further discuss these details.