By Laura Malcom, CPA | Audit Manager
Most nonprofit organizations today are led by a volunteer board of directors responsible for helping the group achieve its mission while providing sound governance and financial management1. In keeping with their fiduciary duty to provide effective financial oversight, many boards appoint an audit committee if not already required by the organization’s governing documents. The audit committee not only oversees the annual financial statement audit, it can play a key role in the organization’s financial health and provide some fundamental benefits.
Audit Committee Composition and Responsibilities
An audit committee commonly consists of three to four individuals led by an audit chairperson, but it could just as easily be organized as a task force. Sometimes the audit committee is essentially the same as the organization’s finance committee. Regardless of structure, each member of the audit committee should be completely independent of the organization in order to serve in the most objective manner possible. When selecting committee members, the board should consider individuals with a financial background, typically a current or retired certified public accountant, tax attorney, financial advisor, or Chief Financial Officer. This small working group of financial professionals should have the knowledge and background to execute audit committee tasks efficiently and help the organizations make critical financial decisions.
Role in the Audit Process
During the audit process, the audit committee typically participates in a pre-audit meeting with the auditor to discuss any reported improprieties or other issues or concerns. This allows the auditor to focus the necessary time and attention to these specific areas and approach the audit efficiently. Following the audit, the audit committee and auditor should meet again to recap the results of the audit. This meeting may include an overview of the audited financial statements, any reported internal control deficiencies and best practice recommendations, the IRS Form 990 (if the audit firm is also engaged to prepare the organization’s tax return), and if necessary, any concerns the auditors have regarding the organization’s financial health. Finally, the audit committee commonly presents the results of the annual audit to the full board of directors with the external auditor. Audit committee members play a key role in helping board members without financial backgrounds understand and interpret audit results, tax returns and the organization’s key financial metrics.
Value Beyond the Audit
While the primary role of the audit committee is to oversee the process for the external audit of the organization’s financial statements, they also perform other activities that are also typically the domain of the audit committee. These can include the selection and/or re-engagement of the external auditor, overseeing the tax return preparation process, and making recommendations to the full board on other financial-related decisions. In addition, the audit committee chairperson may serve as the point person for reporting financial improprieties within the organization, such as fraud or abuse.
It is important to note that the audit committee’s role in financial oversight precludes members from being involved in the day-to-day financial operations of the organization. Instead they should leverage their backgrounds in financial management to assist leadership in following up on and correcting any reported audit findings. This may include working with management in developing a corrective action plan, and ensuring that internal controls and proper policies and procedures are in place. While doing this though, the committee should be careful not to obstruct its independence.
A highly recommended best practice, establishing an audit committee or task force provides substantial efficiencies in the audit process and critical financial oversight of the organization. If your organizations is considering an audit committee or task force, consult the resources linked below for additional guidance. For more information about audit committee best practices or to discuss your organization, contact Laura Malcom at 301-951-9090 or email@example.com.
1 Board Roles and Responsibilities, National Council of Nonprofits