Posted on October 8th, 2020 in Not for Profit

Do We Need an Audit? An Overview of Not-for-Profit Organizations and Their Financial Statement Requirements

business meeting looking at financials

There have been a number of changes in recent years to modernize the laws governing corporations without share capital.  These corporations were previously governed by the Corporations Acts in the various jurisdictions, but the laws and regulations created for business and for-profit enterprises were not effective at times for the not-for-profit sector.  In 2011, the new Canada Not-for-Profit Corporations Act (CNCA) came into force to govern the not-for-profit corporations incorporated federally.  Ontario created a similar Act, the Ontario Not-for-Profit Corporations Act (ONCA) that received Royal Assent in 2010 but has not yet been proclaimed or put in force.  The ONCA will govern not-for-profit corporations incorporated in Ontario when it is put in force. Originally the ONCA was anticipated to be launched in early 2020 however the ONCA webpage indicates further delays.

There are a number of various legal changes addressed in the new legislation, but we wanted to focus on the section on Financial Statements and Review.  A corporation must prepare financial statements each year which comply with the requirements of the Not-for-Profit Act.  The financial statements must be prepared in accordance with the Canadian Generally Accepted Accounting Principles (GAAP) as set out in the CPA Canada Handbook.

There are new guidelines introduced in both the CNCA and the ONCA on the level of public accounting assurance required.  We have summarized these below in a chart and included some important definitions.

The CNCA classifies not-for-profit corporations into two categories – soliciting corporations and a non-soliciting corporations.  A corporation is considered soliciting when it has received more than $10,000 in revenue from public sources in a single financial year.  Public sources include gifts or donations from people who are not members, directors, officers or employees, grants from all levels of government and funds from another corporation that has also received income from public sources.  A corporation is non-soliciting if it has received no public funds or less than $10,000 in public funds in each of its previous three fiscal years.

The differentiation is important as the government wants to ensure that organizations receiving public funds are sufficiently transparent and accountable for that income.

The ONCA has a similar structure – public benefit corporations and non-public benefit corporations.  The public benefit corporation has the same characteristics as a soliciting corporation under the CNCA.

Private foundations may be considered non-soliciting or a non-public benefit corporation, depending on their revenue sources.

As a reminder, all corporations governed by the CNCA must send a summary of its annual financial statements or a copy of a document reproducing the required financial information (such as an annual report) to the members between 21 and 60 days before the day on which the annual meeting of members is held, or the day on which a resolution in writing is signed by the members. (The only exception is if the bylaws allow the corporation to give notice to the members that the annual financial statements are available for viewing at the registered office and the members may request a copy free of charge.)

A soliciting corporation must provide its annual financial statements to Corporations Canada not less than 21 days before the annual general meeting of members or without delay in the event that the corporation’s members have signed a resolution approving the statements, instead of holding a meeting.  The date must also not be later than six months after the corporation’s preceding financial year.

All corporations that will be governed by the ONCA will be required to give a copy of the annual financial statements not less than 21 days before each annual general meeting to all members who request a copy.

Incorporated Federally

Type of Corporation Gross Annual Revenue per Financial Year Appointment of Public Accountant by Members Financial Review Required
Soliciting $50,000 and less Must appoint a public accountant by ordinary resolution unless members waive appointment by annual unanimous resolution Public accountant must conduct a review engagement; but members can pass an ordinary resolution to require an audit instead. If no public Accountant is appointed, then only a compilation is necessary
Soliciting $50,001 to $250,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit; but members can pass a special resolution to require a review engagement instead
Soliciting more than $250,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit
Non-Soliciting $1,000,000 and less Must appoint a public accountant by ordinary resolution unless members waive appointment by annual unanimous resolution Public accountant must conduct a review engagement; but members can pass an ordinary resolution to require an audit instead. If no public Accountant is appointed, then only a compilation is necessary
Non-Soliciting more than $1,000,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit

These rules were effective as of October 2011 when the CNCA came into force.

Incorporated in Ontario

Type of Corporation Gross Annual Revenue per Financial Year Appointment of Public Accountant by Members Financial Review Required
Public benefit corporation $100,000 and less Must appoint a public accountant by ordinary resolution unless members waive appointment by an extraordinary resolution (at least 80% approval) Public accountant must conduct a review or audit engagement. If no public accountant is appointed, then only a compilation is necessary
Public benefit corporation $100,001 to $500,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit; but members can pass an extraordinary resolution to require a review engagement instead
Public benefit corporation more than $500,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit
Non-Public Benefit $500,000 and less Must appoint a public accountant by ordinary resolution unless members waive appointment by annual unanimous resolution Public accountant must conduct an audit or review engagement. If no public accountant is appointed, then only a compilation is necessary
Non-Public Benefit more than $500,000 Must appoint a public accountant by ordinary resolution at each annual meeting  Public accountant must conduct an audit; but members can pass an extraordinary resolution to require a review engagement instead

These rules will be effective when the ONCA comes into force; however, recently passed Bill 154 allows members in Ontario corporations with $100,000 and less in annual revenue to pass an extraordinary resolution (80% approval) to not appoint an auditor and not to have an audit as of January 13, 2018.

Before a Board of Directors decides to take advantage of these new rules allowing the organization to be exempt from an audit (presumably to reduce annual professional fees), it is important to remember that an independent, external review of management’s financial reporting is an effective tool to fulfill a Board member’s governance responsibilities.  We would also caution against moving away from an audit if you anticipate your organization’s revenues to exceed the minimum thresholds that require an audit in the near future.  The costs of transitioning to and from an audit in a short period of time generally exceed the cost savings from moving away from an audit.

If you require any further information or explanation in regards to recent changes for your organization’s external financial reporting requirements, please contact your DJB advisor.