When Does a Massachusetts Nonprofit Need a CPA? Audit, Review, Form 990, Form PC, and Board Financial Oversight
By Steven DiVirgilio, CPA

For many charitable organizations, financial reporting is treated as an annual compliance task. The organization closes the books, prepares the Form 990, files the Massachusetts Form PC, and moves on. In reality, nonprofit financial reporting is part of the organization’s public accountability. Donors, grantors, lenders, board members, regulators, and the community may all rely on the organization’s financial statements and tax filings to evaluate how funds are received, managed, restricted, and spent.

A Massachusetts nonprofit CPA can help a charitable organization understand when CPA-prepared nonprofit financial statements are required, what level of service is appropriate, and what financial information the board should review throughout the year. This is especially important for nonprofits in Boston, Greater Boston, Cambridge, Everett, and throughout Massachusetts because state filing requirements may require a nonprofit review in Massachusetts or a nonprofit audit in Massachusetts depending on the organization’s gross support and revenue.

Nonprofit accounting is different from ordinary small business accounting. A nonprofit is not simply measuring profit. It must also track donor restrictions, grants, program expenses, management and general expenses, fundraising expenses, board-designated funds, related-party transactions, and compliance with state and federal reporting requirements. For that reason, a CPA for nonprofit organization matters can provide value beyond the annual filing process.

Why Nonprofit Financial Reporting Matters
A nonprofit’s financial statements should tell a clear story about how the organization uses its resources to support its mission. Reliable nonprofit financial statements help answer important questions:

• Is the organization financially stable?
• Are donor-restricted contributions being tracked properly?
• Are grants being used for their intended purpose?
• Are program, administrative, and fundraising expenses properly classified?
• Does the board receive accurate and timely financial reports?
• Are the Form 990, Massachusetts Form PC, and financial statements consistent?
• Are there internal control weaknesses that need to be addressed?
  

For smaller nonprofits, financial reporting may begin with basic bookkeeping and internally prepared statements. As the organization grows, receives larger grants, expands programs, or crosses state filing thresholds, CPA involvement often becomes more important. A nonprofit audit Massachusetts organizations may need is not only about compliance. It can also strengthen accountability, improve board oversight, support grant applications, and help donors feel more confident in the organization’s stewardship.

Financial reporting also affects reputation. Donors and foundations often want to see that a nonprofit has organized accounting records, responsible governance, and transparent reporting. A clean set of nonprofit financial statements can help demonstrate that the organization takes its financial responsibilities seriously.

When a Massachusetts Nonprofit May Need a CPA Review or Audit
Massachusetts charitable organizations should monitor the gross support and revenue thresholds that determine whether CPA-reviewed or CPA-audited financial statements are required.

Under current Massachusetts public charity guidance, organizations with gross support and revenue of more than $500,000 in a fiscal year must generally submit financial statements audited or reviewed by an independent certified public accountant. Whether the financial statements must be reviewed or audited depends on whether gross support and revenue exceeded $1,000,000 for the year. Organizations above the lower threshold may require a CPA review, while organizations above the higher threshold may require a CPA audit.

This is where a Massachusetts Form PC CPA can be especially helpful. The Form PC is the Massachusetts annual filing for public charities, and the CPA financial statement requirement depends on the organization’s revenue level and facts. The threshold analysis should not be based only on the organization’s budget or bank deposits. Management should review the applicable gross support and revenue calculation and consider grants, contributions, program service revenue, investment income, and other sources of support.

Nonprofits should evaluate the audit or review requirement before year-end rather than waiting until the filing deadline approaches. A review or audit requires planning, reconciled accounting records, supporting documentation, board minutes, grant agreements, contribution records, payroll records, and time for management to answer CPA questions.

A review and an audit are not the same. A review provides limited assurance and is generally based on inquiry and analytical procedures. An audit provides a higher level of assurance and requires the CPA to obtain audit evidence, assess risk, perform testing, and issue an opinion on whether the financial statements are presented fairly in accordance with the applicable financial reporting framework.

Form 990 Filing Requirements and Recent IRS Transparency Developments
In addition to Massachusetts Form PC requirements, many tax-exempt organizations must file an annual federal information return with the IRS. Depending on the organization’s size and facts, this may be Form 990, Form 990-EZ, or Form 990-N.

Form 990 is more than a tax form. It is one of the most visible public documents for a nonprofit organization. Donors, grantors, banks, watchdog groups, journalists, board members, and regulators may review Form 990 to understand the organization’s revenue, expenses, compensation, governance, program services, fundraising, grants, related-party transactions, and overall financial reporting practices.

In general, organizations with gross receipts of $200,000 or more, or total assets of $500,000 or more, file the full Form 990. Smaller organizations may be eligible to file Form 990-EZ, and very small organizations with normally $50,000 or less in gross receipts may be eligible to submit Form 990-N, also known as the e-Postcard. The annual Form 990 series return is generally due by the 15th day of the 5th month after year-end, with an automatic extension generally available on Form 8868.

Your CPA should help ensure the return is consistent with the accounting records, financial statements, board minutes, compensation approvals, grant records, donor restriction records, and Massachusetts Form PC. Inconsistencies can raise questions from donors, grantors, regulators, and the public.

Recent IRS and Treasury developments also indicate that Form 990 may become even more important as a transparency and governance document. The IRS plans to revise Form 990 to improve transparency and provide clearer reporting for certain activities of 501(c)(3) organizations, including government grants, government contracts, and fiscal sponsorship arrangements.

That development is important because Form 990 is moving further toward public accountability, not merely annual tax compliance. Nonprofits that receive government funding, act as fiscal sponsors, receive restricted contributions, make grants, or operate through related-party arrangements should expect more attention to how funds are received, controlled, spent, documented, and reported.

Key Form 990 areas to review include government grants and contracts, fiscal sponsorship arrangements, restricted contributions, program service revenue, functional expense allocations, compensation, related-party transactions, fundraising arrangements, grant-making activity, unrelated business income, and consistency between Form 990, the reviewed or audited financial statements, and Massachusetts Form PC.

Audit vs. Review vs. Compilation
Nonprofit leaders often use the words audit, review, and compilation interchangeably, but they are different CPA services.

A compilation is the lowest level of CPA financial statement service. In a compilation, the CPA assists management in presenting financial statements. The CPA does not provide assurance that the financial statements are free from material misstatement. A compilation may still be useful for smaller nonprofits that want professionally prepared financial statements for internal use, lenders, board members, or basic reporting purposes.

A review provides limited assurance. In a review engagement, the CPA performs inquiries and analytical procedures to determine whether the CPA is aware of any material modifications that should be made to the financial statements. A review is more involved than a compilation but less extensive than an audit.

An audit provides the highest level of assurance among these services. In a charitable organization audit, the CPA obtains an understanding of the organization, evaluates risks, performs audit procedures, tests selected transactions and balances, and issues an opinion on the financial statements.

The appropriate service depends on the organization’s size, filing requirements, funding sources, board expectations, and financial reporting needs. A small nonprofit may need internally prepared statements or a compilation. A growing nonprofit may need a review. A larger organization may need an audit. In some cases, a board may choose an audit even when one is not legally required because of governance, donor, lender, or grant compliance expectations.

Common Nonprofit Accounting Issues
Nonprofit accounting Boston organizations face often includes issues that are different from traditional business accounting.

Donor restrictions are one of the most common issues. Contributions may be restricted for a specific program, time period, purpose, or project. If restricted funds are not tracked correctly, the financial statements may not properly present net assets with donor restrictions and net assets without donor restrictions.

Grant accounting also requires care. Some grants are conditional, meaning the organization must meet certain barriers or requirements before revenue is recognized. Other grants may be restricted for specific uses. The accounting treatment depends on the terms of the grant agreement.

Functional expense reporting is another important area. Nonprofits generally classify expenses by function, such as program services, management and general, and fundraising. These classifications affect the financial statements and Form 990. Poor expense allocation can make the organization appear less transparent or less efficient than it really is.

Related-party transactions should be reviewed carefully. Examples include payments to board members, leases with related entities, loans involving insiders, or transactions with businesses owned by officers or directors. These transactions may be permissible, but they should be approved, documented, and disclosed when required.

Payroll and contractor classification can also create risk. Nonprofits may rely on part-time employees, consultants, instructors, caregivers, grant-funded workers, and administrative staff. Misclassifying workers can create payroll tax, unemployment, and compliance issues.

Weak segregation of duties is another common challenge. Many small nonprofits have limited staff, meaning one person may receive funds, make deposits, pay bills, record transactions, and reconcile bank accounts. This does not automatically mean fraud exists, but it increases risk. Boards should consider compensating controls, such as review of bank statements, approval of disbursements, dual signatures for larger payments, and periodic financial review by the treasurer or finance committee.

Board Member Red Flags
Board members do not need to be accountants, but they do have a responsibility to exercise financial oversight. A nonprofit board should be alert to signs that the accounting records, financial statements, or internal controls need attention.

Common red flags include late bank reconciliations, unexplained transfers, missing supporting documentation, delayed financial statements, excessive use of manual checks, lack of approval for large expenses, unusual payments to insiders, negative cash flow without explanation, and financial reports that do not agree with the Form 990 or Form PC.

Another red flag is when only one person understands the accounting system. If the executive director, bookkeeper, treasurer, or founder is the only person who can explain the numbers, the organization may have a governance weakness. Financial information should be understandable to the board and supported by proper records.

Boards should also watch for restricted funds being used for general operating expenses without proper tracking. This can happen unintentionally when cash is tight, but it can create donor, grant, and reporting issues.

Budget-to-actual reporting is also important. If actual results are significantly different from the approved budget, the board should understand why. Variances may be reasonable, especially if new grants or programs were added, but they should be explained.

How a CPA Can Help a Nonprofit
A CPA can assist a nonprofit organization with financial statement preparation, compilations, reviews, audits, Form 990 coordination, Massachusetts Form PC support, chart of accounts guidance, internal control review, board financial reporting, and accounting guidance for restricted contributions, grants, and functional expense reporting.

For a smaller nonprofit, the focus may be building a clean accounting system and producing reliable monthly financial reports. For a growing nonprofit, the focus may shift to preparing for a CPA review, improving internal controls, and ensuring the Form 990, Form PC, and financial statements are consistent. For a larger nonprofit, the organization may need a full audit, more formal board reporting, and stronger year-end closing procedures.

Working with a Massachusetts nonprofit CPA before the filing deadline can help the organization avoid surprises. Proper nonprofit financial reporting supports compliance, transparency, accountability, and trust.

About the Author
Steven DiVirgilio, CPA, is a Massachusetts Certified Public Accountant based in the Greater Boston area. He advises nonprofit organizations with financial statement preparation, compilations, reviews, audits, Form 990 coordination, Massachusetts Form PC filing support, accounting system guidance, and board financial reporting support. Steven is also an adjunct professor at Babson College.

This article is for general informational purposes only and does not constitute legal, tax, accounting, or valuation advice. Each matter depends on its specific facts and circumstances.