Federal Campaign asked to lift audit threshold

Tim Delaney, president and CEO of the National Council of Nonprofit Organizations on Oct. 21 petitioned Mark Lambert, director of Combined Federal Campaign Operations, to lower the audit threshold for small nonprofit organizations wishing to participate in the annual fund drive for federal employees. HANO is an NCNA state association member. Here is the text of his letter (click here for PDF version):

On behalf of our more than 20,000 small and midsize community-based nonprofit members across the country, the National Council of Nonprofit Associations requests that the Combined Federal Campaign increase the $100,000 audit threshold for nonprofits to be eligible for listing as a local charity. This letter follows up on an initial phone conversation Ann Beltran of NCNA had with you, in which you invited us to explain how the existing low audit threshold operates as a barrier to CFC participation by small and midsize nonprofits.

The nonprofit sector consists of a variety of organizations, from small soup kitchens, local domestic violence shelters and tiny youth sports programs, to larger national organizations like AARP and the Boy Scouts of America, all with very different financing situations. While the large national organizations are the most visible, the sector is primarily made up of smaller organizations. According to the National Center for Charitable Statistics, more than 70 percent of all nonprofits reporting to the IRS claimed expenses of $500,000 or less in 2005.

Given the limited resources of these nonprofits, full financial audits impose a significant financial burden because they cost thousands of dollars. While it is difficult to develop an accurate national measure of audit costs, anecdotal evidence from our North Carolina association shows that an audit for an organization with revenue under $600,000 can range from $12,000 to $15,000. Further reports from the field in Michigan indicate the price of audits is increasing. Clearly, these audits have a significant financial cost, but they can also place a burden on nonprofit staff in smaller organizations who must prepare the books so they can be audited using accrual accounting methods. 

The CFC’s low $100,000 audit threshold effectively cuts off small nonprofits from a potentially valuable source of funding. In response to concerns from one of our state association members who reported to us the high costs of a financial audit -- costs that reportedly are increasing significantly because of the new IRS Form 990 requirements -- NCNA began researching the audit thresholds applied in different states. (For research to date, click here and scroll down to view table attached to this letter.)

Our research is not complete, but our initial findings reveal a variety of different ways to approach the auditing requirement. Almost every state we have examined (19 out of 21) sets an audit threshold via legislation. In examining these 19 states, the average threshold is $507,143, far above CFC’s $100,000 threshold.  

Our research also uncovered the use of tiered systems in several states that set different reporting requirements based on income level. For instance, in Maryland any nonprofit with gross income greater than $200,000 must provide an “audited financial statement”; however, a nonprofit with income between $100,000 and $200,000 need only file a less costly “reviewed financial statement.” There are several other tiered structures in different states that we would be happy to share with you.

We applaud CFC’s mission of simplifying the giving process for federal employees and providing support to local charities. CFC’s current audit requirement, however, excludes small and medium sized local charities from eligibility. There must be a better system for maintaining financial accountability that does not exclude them and allows federal employees better options to target their individual giving.

While NCNA wholeheartedly supports reasonable accountability and transparency efforts, these efforts must be weighed against the costs of such reporting requirements and alternative accountability options. Modifying the threshold by raising it or adopting more flexible requirements for small and midsize nonprofits would remove financial barriers for these nonprofits to receive contributions and further their mission of public service.  Several options exist, including the following approaches being used successfully elsewhere: 

• Raise the threshold. The Office of Management and Budget sets its threshold for a single audit at $500,000 of government money expended, which still protects the federal government. Moreover, as noted, state audit requirements are typically much higher than the CFC threshold of $100,000. [Hawaii's new Act 174 sets the audit threshold for nonprofits soliciting donations in the state at $500,000]
• Adopt a tiered system. At least 12 states use some type of tiered system for financial reporting, which allow smaller organizations to report using formats appropriate to their size and capacity. This imposes less cost on the organizations, while still allowing for accountability.