Audit and Reporting Determination
Is your Massachusetts organization required to have a financial statement and/or a compliance audit?
Both for-profit and not-for-profit organizations can have audit and compliance reporting requirements.
Not-for-Profit Organization
Does your nonprofit organization have total gross revenue of $500,000 or more for a given year?
Under the Massachusetts Attorney General’s rules, a charitable organization with revenue of $500,000 or more must have a financial audit performed and the audited financial statements must be filed with the Annual Form PC filing. Revenue for this purpose is defined as net contributions, grants, and gifts received.
If your nonprofit organization has less than $500,000 in annual gross revenue, there is no audit requirement imposed under the Massachusetts Attorney General’s rules; however, the annual Form PC filing must be accompanied by either Audited or Reviewed financial statements if total gross revenue is at least $200,000 but less than $500,000 for a given year. Revenue for this purpose is defined as money received from contributions, grants, program service revenue, investment income, and other income (i.e. net rental income, net income from fundraising events, royalties, net income from gaming activities, net income from sales of inventory and miscellaneous revenue).
Depending on the source and nature of revenue, additional audit requirements may also apply. Answer the following to determine if further requirements apply.
Does your organization receive revenue or have outstanding loans directly or indirectly from State or Federal government sources?
Certain forms of revenue or loans may trigger audit and reporting requirements when received directly or indirectly from certain government sources. Generally, if you have no such revenue, then your audit and reporting requirements will likely be determined by the rules established by the Attorney General’s Office under the Form PC filing requirements.
Possible other sources of reporting requirements for consideration may include the terms of grants, organizational by-laws, and requirements of national affiliations.
Does your nonprofit organization expend $500,000 or more in a year in federal awards, or have outstanding federal loans or loan guarantees in excess of $500,000?
If your nonprofit organization expends $500,000 or more in federal awards within one year, it must have an A-133 audit performed by an independent public accounting firm. An A-133 audit is an audit performed under regulations prescribed by the federal Office of Management and Budget (OMB) in Circular A-133. An audit under A-133 requires the application of Government Auditing Standards contained in the “Yellow Book.”
If your non-federal entity expends $500,000 or more in a year in federal awards, but only under one program or program cluster (two or more like programs) excluding R&D, then you may be exempt from a single (entity-wide) audit under A-133, and may be able to elect to have a program-specific audit instead. A program-specific audit does not encompass all entity activity, but instead only a specific program is subjected to the audit procedures.
The $500,000 threshold for expenditures is also used for certain loan and loan guarantee programs. For example, a nonprofit organization that provides housing may not have an audit requirement by virtue of rent subsidy revenue that is less than $500,000 annually, but an audit requirement may be present if the same entity has outstanding loans from a federal agency (directly or indirectly) with a principal balance in excess of $500,000 at the end of the reporting period.
If your nonprofit organization does not expend $500,000 or more in federal awards within one year, the organization is not required to have an A-133 audit performed, but may need a “yellow book” audit depending on applicable laws, regulations, agreements, and grants. A “yellow book” audit is an audit that is conducted in accordance with the Government Auditing Standards (GAS) and typically includes assessments of internal controls and compliance in addition to the audit of the financial statements. A requirement to have an audit in accordance with GAS will typically be embodied in funding grants and contracts.
In either case, your organization may still be required to file a Uniform Financial Report (UFR) under the Commonwealth of Massachusetts regulations. See the definition of a human or social services contractor or subcontractor in the following paragraphs.
Following are filing exceptions/exemptions for nonprofit organizations:
Nonprofit organization with very limited revenues and support
- If your nonprofit organization had gross revenue less than $100,000 from all sources during your organization’s reporting year, then you do not have to file a full UFR, but must file (at a minimum) a UFR cover page and a Form PC.
- If your company is being audited for other reasons, you can file audited (non-UFR) financial statements along with a UFR cover page.
Small nonprofit organization
- If your nonprofit organization’s reporting year had gross revenues equal to or greater than $100,000 but less than $500,000 from all sources, then your organization is considered exempt from filing a full UFR, but must file a UFR cover page, Independent Accountant’s Review Report and Reviewed Financial Statements with footnotes, UFR Supplemental Schedules, and a Management Letter (if applicable).
For-Profit Organizations
For for-profit entities, determine your entity type: is your organization considered to be a human or social services contractor or subcontractor as defined by the Commonwealth of Massachusetts?
A human or social service contractor or subcontractor is any entity that “owns or operates one or more programs of social, special education, mental health, mental retardation, habilitative, vocational, employment and training, or elder services…” In addition, daycare providers contracting with the Department of Early Education and Care (or its contractors) may contractually qualify as subcontractors as may certain vendors contracting with programs funded under the Department of Education.
Both for-profit and nonprofit enterprises that operate as human or social service contractors or subcontractors are required to annually submit independently audited financial statements using the Uniform Financial Report (UFR) template provided by the Operational Services Division (OSD) of the Commonwealth’s Department of Purchased Services, unless the requirement is specifically waived under exemption/exception rules. The Purchase of Service System utilizes a single audit approach through the UFR that is designed to meet the needs of all public, private, and government report users, and to target areas of risk in the system.
If your organization is not considered to be a human or social services contractor or subcontractor as defined by the Commonwealth of Massachusetts, it is not required to file a UFR. Certain subcontracted services can be difficult to define for this purpose. Generally, subcontracted services that are closely related to the core purpose of the funded program represent subcontracted services. As an example, a daycare facility that contracts with another daycare facility to provide services for children funded under a Commonwealth program would represent subcontracted services that would be subject to UFR reporting requirements. If the same facility hires a cleaning company, that service would not be considered subcontracted services since it is incidental to providing daycare services.
For-profit enterprise (any taxable for-profit entity)
- If your business has less than $100,000 in gross revenue, then it must file a UFR cover page and an OSD Expenditures & Federal Funds Listing Letter.
- If your business has more than $100,000 in gross revenue from all sources, then it must file a UFR cover page, Independent Auditor’s Report and Audited Financial Statements (non UFR-Format) with footnotes, Auditor’s Report on Internal Control and Compliance, UFR Supplemental Schedules, Board Acknowledgment Letter, and Auditor’s Checklist & Certification Form.
For-profit entities that receive certain federal contract funding or loans (or loan guarantees) may be subject to audit and compliance requirements under related program requirements.
Generally, if the for-profit entity expends $500,000 or more in federal awards within one year, or has outstanding loans or in certain cases loan guarantees exceeding $500,000, it must have an A-133 audit performed by an independent public accounting firm. An A-133 audit is an audit performed under regulations prescribed by the federal Office of Management and Budget (OMB) in Circular A-133.
An audit under A-133 requires the application of Government Auditing Standards contained in the “Yellow Book.” An audit conducted in accordance with Government Auditing Standards typically includes assessments of internal controls and compliance in addition to the audit of the financial statements.
If your for-profit entity expends $500,000 or more in a year in federal awards, but only under one program or program cluster (excluding R&D), then you may be exempt from a single (entity-wide) audit under A-133, and be able to elect to have a program-specific audit instead. A program-specific audit does not encompass all entity activity, but instead only a specific program is subjected to the audit procedures.
The Department of Housing and Urban Development (HUD) and the Department of Health and Human Services (HHS), primarily through the National Institute of Health (NIH), are two examples of federal agencies that provide a substantial amount of funding to for-profit entities and attach audit and compliance requirements as a condition of acceptance.
