You asked for (1) a summary of certain laws on charitable reporting in Connecticut, Massachusetts, New York, and Rhode Island; (2) the number of charities affected if Connecticut raises its audited report threshold from $ 200,000 to $ 250,000; and (3) a summary of related recommendations in the recent Report of the Panel on the Nonprofit Sector.

SUMMARY

Connecticut and its three neighboring states all require charities to register and file annual financial reports. All require the charities to have their reports reviewed or audited by an independent certified public accountant (CPA) if a charity’s revenues are above a certain threshold. An audit gives a higher level of assurance that an organization’s financial records are accurate than a review. In Connecticut and Rhode Island, charities must file a CPA-audited statement if their revenues are above a threshold. In Massachusetts and New York, charities must file a CPA-reviewed statement if revenues are above a threshold and a CPA-audited statement if revenues are above a higher threshold.

If Connecticut raised its threshold for requiring charities to file an audited statement from $ 200,000 to $ 250,000, about 119 charities would be exempted by the change.

The Panel on the Nonprofit Sector recommended that Congress require charities and nonprofit foundations to file a CPA-reviewed annual statement if their gross revenue is above $ 250,000 and a CPA-audited annual statement if their revenue is above $ 1,000,000.

AUDITS AND REVIEWS

Marilyn Pendergast wrote in the CPA Journal Online that in an audit, an accountant obtains sufficient, competent evidence that enables him to express “reasonable” assurance that the organization’s financial statements are presented fairly (CPA Journal, July, 1994). The level of assurance offered by a review is not as high. In a review, an accountant generally gathers evidence through inquiries and analytical procedures that enables him to express "limited" assurance that the accountant is not aware of any material modifications that should be made to the financial statements.

CHARITABLE REPORTING AUDIT THRESHOLDS

Table 1 displays the thresholds for filing a financial statement audited or reviewed by an independent certified public accountant.

Table 1: Audit Thresholds

Connecticut

Connecticut requires charities to register each year with the state unless they are in an exempted category, like churches or nonprofit hospitals (CGS § 21a-190d). It also requires each registered charity to file an annual financial report for its most recently completed fiscal year (CGS § 21a-190c, as amended by PA 05-101). Two authorized officers, one of whom must be the chief financial officer, must sign the report.

If the charity has gross revenues of more than $ 200,000, its financial report must include an audit report by a certified public accountant. For this purpose, “gross revenue” does not include government grants or fees or revenue from trust funds.

Massachusetts

Massachusetts requires public charities to file an annual written report that includes financial information (Mass. Gen. Laws Ch. 12 § 8F). A charity that has gross revenues of more than $ 100,000, but less than $ 500,000, must submit either (1) a complete audited financial statement with its annual report or (2) a financial statement accompanied by an independent certified public accountant’s review report, as defined by the American Institute of Certified Public Accountants. If a charity’s gross revenue is $ 500,000 or more, it must file a complete audited financial statement. The audited financial statement must be prepared in accordance with the generally accepted accounting principles (GAAP) and reporting practices prescribed by the American Institute of Certified Public Accountants (AICPA).

The AICPA website defines GAAP as the uniform minimum standards of, and guidelines to, financial accounting and reporting (American Institute of Certified Public Accountants). It states that the Financial Accounting Standards Board, the Governmental Accounting Standards Board, and the Federal Accounting Standards Advisory Board are authorized to establish them. The website defines “report” as performing the inquiry and analytical procedures that provide an accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with GAAP.

For charity reporting, “gross revenue” does not include gains or losses from the sale of a capital asset. Massachusetts requires an authorized officer to sign the report.

New York

New York requires registered charities to file an annual written financial report (N. Y. Exec. Law §172-b). If the charity’s revenues are more than $ 100,000 but not more than $ 250,000, it must file an annual financial report accompanied by an independent certified accountant’s review report in accordance with “standards for accounting and review services” issued by the AICPA. It must be prepared in conformity with GAAP. If the charity’s revenues are more than $ 250,000, it must file an annual financial report accompanied by an independent certified public accountant’s audit report containing an opinion that the financial statements are presented fairly in all material respects and in conformity with GAAP.

New York requires the organization president and the chief financial officer to sign the filed financial reports regardless of the amount of revenues.

Rhode Island

Rhode Island requires registered charities to file an annual financial statement (R. I. Gen. Laws § 5-53. 1-2). If the organization has a gross revenue of $ 500,000 or less, it may meet this requirement by filing (1) statements of activities and financial position or (2) Internal Revenue Service (IRS) Form 990. (This is the federal tax form filed by charities recognized by the Internal Revenue Service. ) If its gross revenue is more, it must file an annual financial statement audited by an independent certified public accountant.

AUDIT COST, IMPORTANCE, AND EFFECT OF RAISING THE THRESHOLD

Assistant Attorney General Thomas Fiorentino, who heads up the Public Charities Unit, reports that charities with gross revenue in the $ 200,000 to $ 250,000 range generally pay about $ 3,000 for an audit, based on his experience. The actual cost for a particular charity will vary depending on factors like the complexity of a charity’s organization and the condition of its books and records. He added that charities have not complained about the audit requirement or its cost.

Fiorentino stated that the audit report is important in several ways. It is frequently the only independent source of information about an organization available to either the public or to its own board of directors. He pointed out that smaller charities typically have volunteer board members who, without an auditor’s report, would be wholly dependent on the organization’s executive director for information. In addition, a certified public accountant’s report may provide recommendations for improving internal bookkeeping. Fiorentino stated that raising the threshold from $ 200,000 to $ 250,000 would exempt 119 charities, based on the most recent set of filings.

PANEL ON THE NONPROFIT SECTOR

The Panel on the Nonprofit Sector (Panel on the Nonprofit Sector) is an independent group formed by charities and foundations. Among its recommendations, it seeks changes in federal law. It recommends that Congress require certain charitable organizations to have an annual audit. Currently, this is a matter regulated by state law. Specifically, it asks Congress to require charities that file IRS Form 1990 and have revenues of $ 250,000 or more but less than $ 1,000,000 to have their financial statements reviewed by an independent public accountant. Further, it asks Congress to require charities that file IRS Form 990 and have revenues of $ 1,000,000 or more to have an audit conducted of their financial statements and operations.

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