In-Depth Audit

Nonprofits in Israel are considered on certain levels as public bodies, or publicly funded organizations. As such, the authorities are responsible to audit nonprofits. An in-depth audit, aka 'Judgment Day', is a massive operation, therefore it is done only once every several years.

There are actually 3 different government bodies that may conduct an audit: 1) Registrar of Associations (amutot) under the Department of Justice; 2) Israel Tax Authority; 3) Accountant General, under the Ministry of Finance. All of the above have interest in auditing nonprofits, and will coordinate between themselves.

Typically, a nonprofit will be audited by the Registrar of Amutot infrequently if it has received proper management status, or by the tax authorities if it has received extra tax benefits, particularly public institution status (‘clause 46’) granting Israel donors proportionate income tax returns, or by the general accountant if it receives government funding.

Audits are carried out by accounting firms that are selected to outsource the work by the relevant government office ordering the audit, and the process is accompanied by a representative from that office.

The organization will receive initial notice of the audit, and be ordered to provide a long list of documents by a certain date. Once the ‘first round’ of documents are provided, usually there will follow a second and third round of requests for further documents, information and clarifications.

Often, whether prior to, during, or following the request for documents process of the audit, members of the auditors will pay the organization a visit in person, sometimes intentionally without previous notice in order to surprise those being audited.

If an organization is not following regulations with knowledge, as foul play, it will be penalized, depending on the level of mismanagement, usually with fines and ultimatums. The auditors will always find some items that are not properly reported or managed, and usually will simply order the organization to make the changes, and if they don’t, then the proper management status, tax benefits, and/or government funding will be withdrawn.

Assuming the organization is authentically operating for ideological purposes, it is advised to consistently express goodwill and cooperation. More importantly, an organization should prepare itself for an audit from the beginning, before an audit is expected to take place.

Auditors tend to summon the following: incorporation documents; lists of amuta members and board members; tax certificates; annual reports; general assembly and management board protocols; proposed and/or authorized budgets; internal regulations for conduct and operations; employee contracts and tax reports; bank records; receipts and balance sheets.

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