In Pennsylvania, many medium-sized nonprofit organizations have long had to endure an audit of their financial statements at the end of each fiscal year. A charity that has over $300,000 of income that arises from donations, gifts, nongovernmental grants, gross fundraising events and gross gaming activities has been subject to financial statement audit.
This threshold, which has been in place since 1990, has long been viewed as artificially low, causing nonprofit organizations to spend a disproportionate amount of their funds on audit fees. Now, however, there is a bill floating through Pennsylvania’s legislature that will change these thresholds.
Below is a chart that shows the existing thresholds of reporting and the proposed thresholds under House Bill 1420, which has been put forth by Rep. Keith Greiner, who is a CPA, and has been approved by the Senate State Government Committee.
|Minimal level of financial statement required||
Proposed under HB 1420
|Internally Prepared||Less than $50,000||Less than $100,000|
|Compiled||$50,000 to $99,999||$100,000 to $249,999|
|Reviewed||$100,000 to $299,999||$250,000 to $749,999|
|Audited||$300,000 or more||$750,000 or more|
Not only does the audit threshold increase significantly, the range of revenues for reviewed financial statements are also much larger. Organizations that were once on the cusp of needing an audit may now be in the range to have a compilation performed.
The far-reaching effects of this legislation can be seen in the below chart that shows how many organizations fall into the various revenue categories. (Note: The data are from www.guidestar.org and includes all revenue, some of which, such as program service revenue, may be excluded from revenue that counts toward financial statement level).
|Revenue||Number of PA charities||Existing financial statement level||Proposed financial statement level|
|$50,000 to $99,999||2,338||Compiled||Internally Prepared|
|$100,000 to $249,999||4,666||Reviewed||Compiled|
|$250,000 to $299,999||1,018||Reviewed||Reviewed|
|$300,000 to $749,999||3,967||Audited||Reviewed|
|$750,000 or more||6,185||Audited||Audited|
The table above shows that almost 40 percent of charities that had been subject to audit would potentially only require a review. Furthermore, roughly 82 percent of nonprofit organizations that had been getting reviewed financial statements will be able to drop to a compilation if the legislation passes.
Boards of directors, treasurers and executive directors of nonprofits should be aware of these new changes that would go in effect if the legislation passes. Overall, they are likely to save charities time and effort in preparing for their CPA to prepare the specified level of financial statements that are required by the state of Pennsylvania.
By Dan Massey, CPA, Manager