Frequently Asked Legal Questions
Financial Audits
Q1
When is a foundation required by law to have its financial statements audited?
Under Minnesota law, a foundation or other charitable organization that solicits contributions and received total revenue in excess of $350,000 for its most recent fiscal year is required to have audited financial statements prepared in accordance with generally accepted accounting principles, unless the foundation is a private foundation that did not solicit contributions from more than 100 persons during the fiscal year. In other words, private foundations are required to have audited financial statements only if they solicit contributions from more than 100 persons in a given year and have total annual revenue of more than $350,000. Currently, there is no federal tax law audit requirement.
Q2
Under what other circumstances might a financial audit be recommended or required?
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.
Q3
What is the process for authorizing and approving a financial audit?
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.
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PLEASE NOTE:
None of the material in this publication should be construed as offering legal advice. Seeking legal counsel is recommended before acting on any matter described in this publication.
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