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Should your Nonprofit Organization have an Audit Committee?

October 03, 2014

Why you need an audit committee, their role and who should serve on it.

In our August 2011 blog "To Audit Committee or Not to Audit Committee, that is the Question”, we raised the question – does your organization need an audit committee? A little more than three years later, I still have clients asking whether they need an audit committee, who the audit committee should report to, and whether the finance committee can play the role of the audit committee in addition to their current responsibilities...

Why it is a good idea to have an audit committee?

Although Massachusetts does not require a tax exempt organization to have an audit committee, I would argue that having an audit committee in place is good governance. The difference between the other Board committees, such as the investment committee, the distribution committee or the compensation committee, is that these committees are responsible for very specific areas whereas the role of the audit committee is understanding the overall risk of the Organization. In addition, many organizations have one “financial committee” where they combine the finance committee with the audit committee.

The Nonprofit Risk Management Center explains that many organizations are looking for ways to economize and combine resources, however the benefits of separating these functions and having an audit committee separate from the finance committee is significant. In general, the finance committee is involved in the detail, whereas the audit committee monitors the process. For example, the finance committee’s main task is the approval and periodic review of the budget, while the audit committee reviews and understands the process to ensure policy is being followed.

What is the Audit Committee’s Role?

The National Council of Nonprofits lists the following responsibilities of an audit committee:

  • Hire the audit firm
  • Evaluate the audit process
  • If deemed necessary, work closely with management to prepare for the year-end audit
  • Present the audit findings to the Organization’s Board of Directors

In order to fulfill their responsibilities, the audit committee should develop an audit committee charter, to be reviewed annually, appoint the auditors and agree on the audit fee. They will meet with the independent auditors, ideally prior to commencement of the audit fieldwork and at the conclusion of the audit to review the audited financial statements and related findings, if any, and finally report to the Organization’s Board of Directors.

Having the nonprofit’s finances independently audited doesn’t get a board off the hook, either. Technically, the board oversees the external auditor’s activities, and it is the board that accepts the audit. If the audit misses something, the board can be held responsible. An audit committee can assist the board with the auditing process, from selecting the auditor to accept the results of the audit.

Who serves on the audit committee?

So now that your organization (your Board) is in agreement that they should have an audit committee – who serves on the audit committee? Generally, an audit committee is made up of three to five members, comprised of board members and audit committee members who are not board members, but have a good understanding of the applicable accounting concepts, a financial background, and an understanding of internal controls.

If you do not have an audit committee in place, it is in your best interest to consider doing so. If your organization does have an audit committee, make sure they have an audit committee charter and that they are helping the board of directors with respect to the integrity of the financial statements and compliance with legal and/or regulatory requirements.

Have questions about creating an audit committee for your nonprofit organization or would like more information on this topic? Contact us.

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