Getting Your Audit Committee Up To Par
Corporate reforms in the for-profit sector have prompted nonprofits to also re-evaluate their governance practices in an effort to enhance accountability. One way many organizations have responded is by establishing an audit committee or improving how theirs operates.
Why the need.
Audit committees are generally recommended for organizations that retain outside auditors, particularly those with $1 million or more in total annual revenues, according to The Sarbanes-Oxley Act and Implications for Nonprofit Organizations, provided by BoardSource and Independent Sector. Some states even require not-for-profits with a certain level of annual revenue to have audit committees. Of course, whether you need to create an audit committee depends on your organization and board.
Smaller nonprofits that don't conduct outside audits probably don't need an audit committee. They may have a finance committee instead, which oversees financial matters relating to the organization. Not-for-profits that do have an audit committee should separate it from the finance or investment committee to achieve greater independence.
Effective audit committees serve as positive agents of change by making sure their organizations understand and act on auditor recommendations.
What its responsibilities are
As the name suggests, the primary responsibility of the audit committee is to oversee the annual audit — this involves hiring the outside auditor, renewing the contract and monitoring performance. Additional responsibilities include:
- Meeting with auditors to plan and review the audit and at other times of the year to discuss suggested improvements or areas of concern,
- Recommending the approval or modification of the annual audit to the board,
- Monitoring the adequacy and integrity of accounting, internal control and risk management procedures, and
- Ensuring compliance with all financial reporting requirements.
Also, committee members should encourage a culture that views whistleblowing as a valuable contribution to both the workplace and employees' futures.
How to learn from for-profits
In addition to reaffirming the important role of the audit committee, many not-for-profits have adopted governance standards from the public sector. Nonprofit education and advocacy groups such as BoardSource and Independent not-for-profits. These include:
Ensuring the independence of audit committee members. Audit committee members, who are typically board members, should not be paid consultants or employees of the nonprofit staff members can provide support to the committee as needed. Also, members shouldn't have a financial stake or other conflict of interest with any organizations that conduct business with your not-for-profit. In certain instances, such as when a nonprofit has the need for specific expertise as discussed below, a non-board member might be permitted to serve in an advisory role.
Requiring financial expertise. All audit committee members will ideally possess financial savvy, but one committee member should have a background in analyzing nonprofits and be a "financial expert." This is generally defined as someone with considerable experience analyzing, preparing or auditing financial statements.
Large not-for-profits typically have an easier time attracting board members with financial expertise than do smaller organizations. One way your nonprofit may be able to acquire expertise in this area is to contract with a certified public accountant to act as an advisory member, assuming this practice is permitted by state law. To uphold independence standards, this individual should not be associated with your audit firm or provide other accounting services to your nonprofit.
Overseeing positive change. Effective audit committees serve as positive agents of change by making sure their organizations understand and act on auditor recommendations. As part of the annual audit, most not-for-profits receive a management letter outlining suggestions for improvements relating to financial management, accounting and internal control practices.
Maintaining an active relationship with auditors throughout the year. This includes consulting them as needed with questions about financial regulations or other matters pertinent to the audit. Another sound practice is for the committee to request an annual meeting with
auditors in an executive session to discuss any concerns members may have about the organization's financial situation, risk environment or staff members.
Why it's in your best interest
Like for-profit companies, nonprofits have a broad range of stakeholders and a similar degree of public accountability. And so its in their best interests to follow the highest standards of conduct. By establishing an audit committee and operating it in a manner consistent with prevailing best practices, your organization can demonstrate its commitment to upholding the public's trust.
Investment policies help you chart a prudent course
A carefully crafted investment policy goes a long way toward ensuring an organization's financial protection for individual board members against claims that investments were mishandled.
Investment policies generally address issues including:
- Investment performance goals,
- Appropriate investments in terms of risk, potential yield, liquidity, and social and ethical considerations,
- Guidelines for asset allocation, quality and diversity,
- Performance expectations and accountability requirements for investment managers, and
- Roles and responsibilities of board and staff members in overseeing investments.
Once your investment policy is established, review it quarterly. without regular monitoring, it can easily veer off course, opening up your not-for-profit and board members to risk.
