Effective audit committees are hands on and play a valuable role in the audit process. They can be of significant help to governing boards in effectively performing their fiduciary and oversight roles in ensuring reliable financial reporting, reducing risk, and maintaining donor and public confidence. Here’s what you should know.

Are audit committees required?

Creating a governance structure is important, but an audit committee is not required unless your bylaws specifically state that you have a freestanding audit committee. In some cases, certain states require an audit committee if an organization solicits charitable donations. Keep in mind that many nonprofit organizations have formed audit committees in recent years for greater visibility into internal controls within their organizations.

4 key steps in the audit process

What steps should the board take to ensure that the audit process is being properly monitored and independence is maintained?

• If you do not have a formal audit committee, designate other board oversight for the audit process, such as the executive or finance committee.
• Ensure no members of the committee/board oversight group are employed by the nonprofit organization.
• Meet with the auditors before and after the audit. It is a necessary step of the audit to communicate with those charged with governance in planning and executing the audit. This is a chance for the board to communicate any specific areas they would like focused on.
• Ensure there are no conflicts of interest with your board members and audit firm and maintain documentation of this.

What are the responsibilities of those charged with governance over the audit process?

• Participation in the decision to hire the auditors
• Recommend changes in financial or reporting practices to ensure the organization is operating most effectively
• Reviews the audit reports prior to distribution to the full board
• Reviews and interprets any internal control findings during the audit process.
• Receives and considers actions to recommend to the full board as a result of recommendations from the auditors about actions the nonprofit should take to improve its financial reporting and management practices, as needed.
• The audit committee must ensure that the financial statements transparently and meaningfully portray the organization’s circumstances.

How to put together an audit committee

• Audit committees typically have three to five members. Ensure that state law allows non-board members to serve on standing committees if you choose to look for financial expertise to join this committee outside of your standing board.
• Ensure that all members have the skills knowledge and expertise to understand the audit process and financial statement reporting.
• Effective audit committee members set the tone at the top and focus on ensuring the organization acts in accordance with the best interests of its stakeholders.

Best practices for those charged with governance throughout the fiscal year

• Be aware of the overall financial health of the nonprofit organization.
• Before the initial audit takes place, committee members should understand the recommendations contained in prior years’ audit reports and should be prepared to work with management and the board of directors throughout the year on any financial practices that the auditors note need attention.
• During the year after the audit, the audit committee members usually meet with the nonprofit’s management and the independent auditors to gain a deeper understanding of whether the organization’s financial reporting practices and internal controls are adequate.

Questions? Contact us.