Complete and accurate financial statements are essential for a charitable organization to fulfill its legal responsibilities and for its board of directors to exercise appropriate oversight of the organization’s financial resources. A board that does not have members with financial expertise should retain a qualified paid or volunteer accounting professional to establish whether financial systems and reports are organized and implemented appropriately.

• It is important for the staff to keep complete, accurate, and current financial records and share appropriate records with the board in a timely manner.
• The board should review financial statements at least quarterly. 
• Some organizations are required by law to have an audit. Almost every organization should consider the benefits of having an audit, review, or compilation by an independent CPA. 
• Separating the audit committee from the finance committee provides a check and balance. 
• The auditor reports to the board, not to the staff.

• IRS Form 990 inquires whether the organization’s financial statements are compiled, reviewed, or audited.
• IRS Form 990 inquires whether there is a specific committee responsible for the compiling, reviewing, and auditing of the organization’s financial statements and selecting the auditor. 
• Organizations receiving funds from the government in excess of $500,000 must conduct independent audits. 
• California was the first state to require audits for larger nonprofits (specific revenue and endowment limits) that conduct activity in California regardless of whether the organization solicits contributions from the public in that state.

Federal law requires many public charities and all private foundations to file an annual information return (Form 990, 990-EZ, or 990-PF) with the Internal Revenue Service with accurate information on the organization’s finances and programs. IRS regulations permit any authorized officer of the organization¹ to sign Form 990 returns certifying, under penalty of perjury, that the return and accompanying schedules and statements are true, correct, and complete. The Internal Revenue Code provides for penalties if an organization fails to file a required return or to include required information on Form 990 series returns.

For tax years beginning after August 17, 2006, each public charity with annual revenues of
$25,000 or less ² is required to file an annual notice electronically with the IRS that indicates
its legal name; mailing address; web site address; taxpayer identification number; name and address of a principal officer; evidence of the continuing basis for the organization’s exemption from filing Form 990; and, upon termination, notice of that termination. There are no monetary penalties for failure to file the notice, but failure to file the annual notice for three consecutive years will result in revocation of tax-exempt status.

The Revised Model Nonprofit Corporation Act requires that a nonprofit corporation with members (other than religious corporations) must furnish on request from a member its latest annual financial statements with a balance sheet and  statement of operations. If the statements are prepared by a public accountant, they must include the accountant’s report. Otherwise, the statements must include a statement from the organization’s president or the individual responsible for the corporation’s financial records stating whether the statements were prepared on the basis of generally accepted accounting principles or, if not, the basis of preparation. Some states also require public charities to file their IRS annual information
returns with the state and may impose additional penalties for failure to meet their filing
requirements.

There is currently no federal requirement for audits of charitable organizations (except under
OMB Circular No. A-133 for organizations that expend $500,000 or more in federal grant funds).
Eighteen states require a charitable organization that solicits contributions in the state to submit a copy of an independent audit report or a certified review of financial reports annually if it meets certain financial criteria. The budget thresholds for audit requirements vary substantially. California requires charitable organizations, other than educational organizations and hospitals, to file audited financial statements if their gross annual revenues are $2 million or more,³ whereas Maryland requires organizations soliciting contributions in its state to file audited financial statements if annual total contributions to the organization equal or exceed $200,000.⁴

¹ For a corporation or association, this officer may be the president, vice president, treasurer, assistant treasurer, chief accounting officer or other corporate or association officer, such as a tax officer. For a trust, the authorized trustee must sign.

² Other than houses of worship and specific related institutions, specified governmental instrumentalities, and other organizations relieved of this requirement by authority of the IRS.

³ CA Govt. Code § 12585.

⁴ Maryland Solicitations Act § 6-402.

1. The board depends on the financial statements to oversee the organization’s financial resources. Are our statements generally                                                                             - Prepared in a timely and accurate manner?
   - Understandable and easy to read?
2. Do we know whether we are required to have an independent audit? If not, have we considered the benefits of an audit versus an independent financial review?
3. How do the responsibilities of the finance and audit committees differ? What are the benefits of separating the functions of these two committees?

11 Board Diversity

22 Annual Budget, Financial Performance, and Investments