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To Audit Committee or Not to Audit Committee, That is the Question

August 19, 2011

Congratulations, you've agreed to serve on a charity's board. You arrive at your first meeting ready to learn how to promote the organization's mission, pitch in with fundraising, and help recruit volunteers, only to find that what the board really needs to do is set up an audit committee.

Congratulations, you’ve agreed to serve on a charity’s board. You arrive at your first meeting ready to learn how to promote the organization’s mission, pitch in with fundraising, and help recruit volunteers, only to find that what the board really needs to do is set up an audit committee. Great, you have no experience with audits or auditors. And your fellow board members don’t know much more about auditing than you do. What’s a board member to do?

Why an Audit Committee in the First Place?

A nonprofit’s board is responsible for ensuring that the organization’s finances are, in the words of the Final Report of the Panel on the Nonprofit Sector, “conducted legally, ethically, and in accordance with proper accounting rules.” Unfortunately, as our hypothetical example shows, willingness to serve on a board doesn’t necessarily translate into the expertise needed to fill this particular role.

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.

Does Your Organization Need an Audit Committee?

If your finances are independently audited, you should at least think about having one. The Final Report recommends that “every charitable organization that has its financial statement independently audited, whether legally required or not, … consider establishing a separate audit committee of the board. If the board does not have sufficient financial literacy, and if state law permits, it may form an audit committee comprised of non-voting, non-staff advisors rather than board members.”

Some state regulators impose an audit requirement on the charities registered in their state. Some funding sources require audits of the organizations to which they supply funding. Many board members believe an annual audit is a basic cornerstone of sound management. Regardless of the reason, if your organization is audited, the creation of an audit committee is probably a good idea.

OK, We Need an Audit Committee—Now What?

The following resource can help you and your fellow board members through the processes of establishing and working with an audit committee:

AICPA Audit Committee Toolkit: Not-for-Profit Organizations—tools from A (“Audit Committee Charter Matrix,” a table of audit committee goals and steps to accomplish them) to U (“Unique Transactions and Financial Relationships,” discussion of transactions and arrangements that can increase a nonprofit’s financial risk)

There are some basic goals of an audit committee that you should keep in mind:

  • Hire a firm qualified to perform the audit of your unique organization. What is their experience with organizations of your size and complexity; with your funding sources; with your compliance requirements; etc?
  • Be sure the firm is planning to perform sufficient work to properly audit your organization. You get what you pay for in audits, just like automobiles. A $10,000 poorly performed audit is potentially much more expensive than a $13,000 audit thoroughly planned and executed by professionals.
  • Be sure the audit firm takes the audit of your organization seriously. Be wary of those who want to audit a charitable organization as part of their community service. Believe in human nature – you don’t want to be someone’s low priority item during the slow season.
  • The audit firm should want to meet with you both before the start of the audit and at the conclusion of it. They should be willing and able to answer all of your questions and explain the nature of their work and the results.
  • The audit firm should be willing to assist you with special requests or special projects. They should get to know your organization very well during the audit process and be willing to bring that knowledge to bear on other issues as they arise. A firm unwilling to be involved with you in other than the annual audit may be concerned because they are doing so little during the audit process, they fear it will become obvious to you during a special project.

Remember, the end product of an audit is your own financial statements on which the auditor have attached their (standard wording) opinion. The only way you can distinguish and identify quality work is via the intangible items noted above. Questions? Contact us.

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