An organization that is registered with the Minnesota Attorney General because it solicits charitable contributions is required to include audited financial statements with its annual report to the Attorney General if its total revenue for the year exceeded $750,000. Currently, there is no federal tax law audit requirement.
Financial audits are sometimes required under a foundation's organizational documents. In other cases, contributors, the federal government for certain contracts, or other program partners may require a foundation to have audited financial statements. Other states have more stringent audit requirements for foundations conducting activities or organized in those states. A number of proposals have been made that would impose a federal audit requirement on many charitable organizations, including foundations. The trend is toward more stringent requirements for financial audits of charitable organizations.
The preparation of audited financial statements by an independent auditor generally improves the quality of financial information available, and can help the foundation board members fulfill their fiduciary duties to the foundation. An independent examination permits a competent and objective review of the organization's financial affairs. It can be time-consuming for staff and expensive for smaller foundations, however, and therefore most requirements and recommendations for independent financial audits attempt to balance the size and complexity of the foundation with the expense and time required to prepare audited financial statements.
Financial audits and independent auditors are normally authorized and selected by the foundation's board, which may have a separate audit committee for this purpose. The auditors work with the foundation's audit committee or board and staff to conduct the audit, and normally report their results to the audit committee or board.
Although some sources recommend periodic rotation of audit firms or lead auditors, this is not required by law. The foundation's board or audit committee is responsible for engaging the auditor and defining the scope of the engagement, reviewing the audit, responding to recommendations for changes, and addressing any significant issues that may be brought to light as a result of the audit.