When Does a Washington Nonprofit Need an Audit?

For many Washington nonprofits, the answer depends on more than organization size alone.

A Washington charitable organization generally must obtain an independent, third-party audit when its annual gross revenue averages more than $3 million over the three preceding completed accounting years. The audit must cover the preceding accounting year and must be made available to the public upon request or accessible online.

But that is only one potential audit trigger.

A nonprofit may need an audit even if it is below Washington’s $3 million threshold because of federal funding, grant agreements, lender requirements, contracts, bylaws, board policies, or other stakeholder requirements.

That is why the better question is not simply:

“Are we over the Washington audit threshold?”

It is:

“What financial reporting requirements apply to our organization based on our revenue, funding, agreements, and stakeholders?”

Washington’s nonprofit audit threshold

Washington uses a tiered financial reporting framework for charitable organizations.

The applicable tier is generally based on average annual gross revenue over the organization’s three preceding completed accounting years.

Tier One: $1 million or less

Charitable organizations with $1 million or less in average annual gross revenue are subject to the baseline financial reporting requirements under Washington law.

A financial statement audit is not automatically required solely because the organization falls within this tier.

Tier Two: More than $1 million through $3 million

Organizations with more than $1 million but not more than $3 million in average annual gross revenue must satisfy additional public financial reporting requirements.

They generally must make available either:

the federal financial reporting form normally filed with the IRS, such as Form 990, 990-EZ, 990-PF, or 990-T, prepared by a CPA or other professional who ordinarily prepares such forms; or
an audited financial statement prepared by an independent CPA.

In other words, an audit is an option within this tier, but Washington law does not automatically require every Tier Two organization to obtain one.

Tier Three: More than $3 million

A Washington charitable organization with more than $3 million in annual gross revenue averaged over its three preceding completed accounting years generally must obtain an independent, third-party audit of its financial records for the preceding accounting year.

The audit report must also be made available to the public upon request or accessible on the internet.

What if the nonprofit has been operating for less than three years?

A newer charitable organization does not have to wait three full years before the tiered reporting rules apply.

If the organization has existed for fewer than three years, Washington regulations provide that average gross revenue is calculated based on the number of years the organization has actually been in existence.

For example, a nonprofit that has completed only two accounting years would generally use those two years when determining its average gross revenue for purposes of the tiered reporting requirements.

Are there exceptions to Washington’s audit requirement?

Potentially.

Washington regulations allow the Secretary of State’s Charities Program to waive the Tier Three audit requirement in certain circumstances.

For example, a waiver may be available where an organization averages $500,000 or less in cash received over the preceding three accounting years, even though its gross revenue otherwise exceeds the $3 million threshold. Washington regulations also contemplate relief where an organization exceeded the threshold because of unusual or nonrecurring revenue received in a single year.

Because these are specific exceptions rather than a general exemption, an organization approaching or exceeding the threshold should evaluate the facts before assuming a waiver applies.

A nonprofit can need an audit even if revenue is below $3 million

This is where nonprofit audit requirements become more nuanced.

Washington's statutory threshold is not the only reason an organization may need audited financial statements.

Federal awards and the Single Audit requirement

Nonprofits that expend significant federal awards may be subject to the federal Single Audit requirements under the Uniform Guidance.

For fiscal years beginning on or after October 1, 2024, the Single Audit threshold increased to $1 million of federal awards expended during the fiscal year.

That threshold is based on federal expenditures, not the nonprofit's total annual revenue.

For example, consider a Washington nonprofit with:

$2.2 million of annual revenue; and
$1.1 million of federal awards expended during its fiscal year.

The organization may be below Washington's $3 million state audit threshold but still have a federal Single Audit requirement.

Conversely, an organization could exceed $3 million in annual gross revenue and have little or no federal funding. It may still need a financial statement audit under Washington law without requiring a Single Audit.

The two requirements should therefore be evaluated separately.

Grant agreements may require an audit

Government agencies, private foundations, pass-through entities, and other funders sometimes establish financial reporting requirements that are more restrictive than state law.

A grant agreement might require:

annual audited financial statements;
a financial statement review;
a program-specific audit;
a Single Audit when otherwise applicable;
agreed-upon procedures;
particular internal-control reporting; or
specific financial reports or compliance schedules.

Nonprofits should review major grant agreements before year-end rather than discovering an audit requirement after the fiscal year has closed. Or even better, before the agreements are entered into to begin with.

Banks and lenders may require audited or reviewed financial statements

Debt agreements can also create financial statement requirements.

A bank may require annual:

audited financial statements;
reviewed financial statements;
internally prepared financial statements;
covenant calculations; or
other CPA-prepared information.

These requirements are contractual and may apply regardless of whether Washington law independently requires an audit.

Your bylaws or board policies may require an audit

Sometimes the requirement is self-imposed.

A nonprofit's:

bylaws;
finance policies;
audit committee charter;
board resolutions; or
internal governance policies

may require an annual audit.

These provisions can remain in place long after the circumstances that originally caused the organization to adopt them.

Organizations should periodically review their governance documents to determine whether the required level of assurance still makes sense.

A funder or other stakeholder may request audited financial statements

An audit can also become necessary as an organization grows even before a statutory requirement applies.

Large donors, foundations, government agencies, financial institutions, prospective merger partners, and boards may want additional assurance over financial reporting.

In those situations, management and the board should consider whether an audit provides enough additional value to justify the cost compared with a review or another engagement.

Audit vs. review: what is the difference?

An audit provides a higher level of assurance than a review.

In an audit, the CPA performs procedures designed to obtain reasonable assurance about whether the financial statements are free from material misstatement. Those procedures may include risk assessment, internal-control consideration, confirmations, examination of supporting documentation, analytical procedures, testing, and other audit work.

A review provides limited assurance and primarily involves inquiry and analytical procedures.

Neither engagement should be viewed as inherently “better” in every circumstance.

The right engagement depends on:

legal requirements;
federal award activity;
grant requirements;
lender requirements;
stakeholder expectations;
organization complexity; and
the level of assurance actually needed.

When an audit is mandatory, a review cannot ordinarily be substituted simply because it costs less.

When should a nonprofit start preparing for an audit?

Ideally, well before year-end.

A first-year audit in particular may require additional planning because the CPA firm must understand the organization, its accounting policies, significant programs, funding sources, internal controls, and opening financial statement balances.

Organizations considering an audit should begin preparing by:

reconciling cash and investment accounts monthly;
reconciling receivables, payables, payroll, and other balance-sheet accounts;
maintaining support for restricted contributions;
reconciling grant revenue and expenditures;
reviewing federal funding for potential Single Audit implications;
maintaining fixed-asset and debt schedules;
documenting significant accounting estimates;
reviewing board minutes;
maintaining executed grant and contract agreements;
resolving unusual transactions before year-end; and
establishing a realistic financial close schedule.

Good audit preparation is less about assembling documents after year-end and more about maintaining reliable financial records throughout the year.

How long does a nonprofit audit take?

There is no universal timeline.

The length of an audit depends on factors such as:

organization size;
accounting complexity;
number of programs and funding sources;
federal award activity;
quality of the accounting records;
availability of supporting documentation;
internal controls;
prior-year audit history;
staff availability; and
how quickly requested information is provided.

A well-prepared organization with reconciled accounts and organized supporting documentation is generally positioned for a more efficient audit than an organization still correcting its books after fieldwork begins.

First-year audits also frequently require more planning than recurring engagements.

What does a nonprofit audit cost?

Audit fees vary significantly based on scope and complexity.

Major cost drivers commonly include:

organization size;
transaction volume;
number of entities or locations;
investment complexity;
contribution and grant activity;
restricted funding;
federal awards;
Single Audit requirements;
accounting-system quality;
readiness of financial records;
internal controls;
timing expectations; and
whether the CPA firm must assist with financial statement preparation.

The lowest quoted audit fee does not necessarily produce the lowest total cost to the organization.

Management should also consider internal staff time, disruption, audit delays, rework, and the value of working with a CPA firm familiar with nonprofit accounting and reporting.

Does every Washington nonprofit have to register as a charity?

No.

It is also important to distinguish a Washington nonprofit corporation from a charitable organization subject to the Charitable Solicitations Act.

Washington describes a charitable organization broadly as an entity that solicits or collects contributions from the public to support charitable activity. Certain organizations and activities may be exempt from charitable registration requirements.

Because the $3 million audit requirement discussed above arises under Washington's charitable solicitations law, organizations should determine whether they are subject to that framework rather than assuming every nonprofit corporation is treated identically.

Quick checklist: Does your Washington nonprofit need an audit?

An audit may be required if you answer yes to any of the following:

Does average annual gross revenue exceed $3 million under Washington's charitable organization rules?
Did the organization expend at least $1 million in federal awards during an applicable fiscal year?
Does a grant or government contract require audited financial statements?
Does a lender require an audit?
Do the organization's bylaws or policies require one?
Has the board committed to providing audited financial statements?
Does another funder, regulator, or contractual agreement require an audit?

If none apply, an audit still may be appropriate, but management and the board may also want to evaluate whether a review, compilation, or other financial reporting service better matches the organization's needs.

Frequently Asked Questions

Does a Washington nonprofit need an audit once revenue exceeds $3 million in a single year?

Not necessarily based on the Washington Tier Three threshold alone.

The statute generally uses average annual gross revenue over the three preceding completed accounting years. For organizations in existence for fewer than three years, the average is based on the number of years the organization has existed.

Is the Washington audit threshold based on contributions or total revenue?

The statute refers to annual gross revenue, not merely contributions.

Organizations should therefore avoid looking only at donations when evaluating the threshold.

Is a Form 990 the same as an audit?

No.

Form 990 is an information return filed with the IRS.

An audit is an independent assurance engagement performed by a CPA under applicable professional standards.

For Washington Tier Two organizations, a professionally prepared federal financial reporting form may satisfy one of the state's public financial reporting alternatives, but that does not make the Form 990 an audit.

Does receiving federal grants automatically require a Single Audit?

No.

The federal requirement is generally based on the amount of federal awards expended, rather than merely whether an organization received a federal grant.

For fiscal years beginning on or after October 1, 2024, the Uniform Guidance threshold is $1 million of federal awards expended.

Can a nonprofit choose a review instead of an audit?

Only when an audit is not otherwise required.

If Washington law, the Uniform Guidance, a grant agreement, lender, contract, or governance document specifically requires an audit, a financial statement review generally does not satisfy that requirement.

The bottom line

For Washington charitable organizations, more than $3 million of average annual gross revenue over the preceding three completed accounting years is the primary state-law audit threshold.

But nonprofit leaders should not stop there.

Federal funding, grant agreements, lending arrangements, contracts, governance documents, and stakeholder expectations can create an audit requirement even when the organization falls below the Washington revenue threshold.

The best approach is to evaluate audit requirements before year-end so the organization has time to select the appropriate engagement, prepare its records, coordinate with its CPA firm, and avoid surprises.

How Bilotta & Company can help

Bilotta & Company, CPAs, LLC works with nonprofit organizations on financial statement audits, reviews, Single Audits, Form 990 compliance, and year-round financial stewardship.

Our nonprofit work is designed to help organizations address both sides of financial accountability: meeting external reporting requirements while building stronger financial information, processes, and oversight internally.

Through our Nonprofit Navigator®Financial Stewardship program, we also support organizations that need ongoing accounting, controllership, financial reporting, forecasting, board reporting, and fractional financial leadership beyond the annual audit.

If your organization is approaching an audit threshold, receiving significant federal funding, or evaluating whether an audit or review is appropriate, the first step is determining exactly which requirements apply before defining the engagement.

This article is intended for general informational purposes and does not constitute legal advice. Requirements can vary based on an organization's facts, funding arrangements, contracts, and regulatory status.