2020 was the year of the pandemic and for many nonprofits that meant receiving a lot of new unique funding. The federal government, local governments, and many nonprofits and foundations awarded a massive amount of additional pandemic relief funding in 2020 and this continues into 2021. One thing most of this funding had in common is that it was created and awarded quickly without a lot of guidance or with constantly changing guidance. While nonprofits have done their best to stay on top of the current changes, they may not have been aware of the additional requirements for their annual financial statement reporting.
The first thing that smaller nonprofits may not be aware of is the need to have an annual audit. There are many nonprofits that, during a normal year, do not need to obtain an audit of their financial statements. However, with the additional funding and new funding sources, they may meet the requirements to have an audit in 2020. Many states have requirements that once a nonprofit reaches a certain size, they must submit an audit with their annual state filing. For example, Minnesota requires a nonprofit to obtain an audit when they receive more than $750,000 of revenue in a year. It is important to remember that this revenue number is mostly based on generally accepted accounting principles (GAAP) revenue determinations, not cash-basis. So, if you keep your financial statements on the cash basis and received a lot of pledges in the current year, it might be worth checking in with a CPA to see if you meet this $750,000 requirement under GAAP. The National Council of nonprofits keeps a list of the requirements by each state.
Beyond the state requirements, individual donors, grantors and lenders may also require a nonprofit to obtain and submit audited financial statements. It is important to thoroughly review all the award documents and possibly reach out to funders if you are not clear about these requirements.
In addition to financial statement audit requirements, there is a compliance audit requirement if you expend federal funding in excess of $750,000 in any year. Federal funds under this requirement can consist of award received directly from the federal government, or passed through a local government or other nonprofit. This information should be included in the award agreement you receive, but with the crazy year everyone had in 2020, it might be worth reaching out to confirm with funders whether the funding is pass-through federal funds or not if you suspect the federal government was the original source of the funding (i.e., All the CARES funding awarded to states that was then passed through the local organizations). One bit of good news is the Paychex Protection Program loans which many organizations received are not included in this calculation.
It is important that you reach out early to your auditor (or a CPA if you have not had an audit before) to discuss the need for a Single Audit if you think you might require one for 2020. Not all CPA firms are familiar with or comfortable performing Single Audits, so they may need to bring in outside help or may recommend you find another auditor for 2020. Even if your auditor is familiar with Single Audits, these compliance audits take more time and involve testing above and beyond what occurs in a financial statement audit. Having extra time to prepare will be beneficial to both you and your auditor to make the year-end audit process go smoothly.
You have been doing a great job staying on top of the many changes in funding sources and compliance requirements throughout the year to make sure you do not have to return any of the additional funding you received during the pandemic to help keep your organization afloat. Let’s make sure you are ready for that that one last requirement that is sneaking up on you with your annual reporting.