Why Your Nonprofit Needs an Audit Committee

Creating both a finance committee and an audit committee offers a number of benefits to a nonprofit organization. Not only might it be a legal requirement, such as in New York under the Nonprofit Revitalization Act of 2013[1], but if a nonprofit’s finances are independently audited[2], you should certainly consider having an audit committee to oversee the process. They can be of significant help to governing boards in effectively performing their fiduciary and oversight roles.

Financial Committee vs. Audit Committee

In general, a finance committee is responsible for monitoring the organization’s financial status. They review monthly reports, manage investments, and oversee the preparation of the annual budget and financial statements. Through their management, the board is able to fulfill their fiscal responsibility.

An audit committee is given authority by the board of directors for overseeing the organization’s external audit process. It is not involved in the daily accounting functions, but rather ensures the integrity of the audit process. An audit committee should ideally be an independent committee that does not include any of the finance committee members nor staff members, including the CEO or CFO.

 Key Responsibilities of an Audit Committee

Audit committees should have their responsibilities detailed carefully to ensure there is a clear boundary between them and the financial committee. This is the only way to ensure the organization realizes the benefit of both.

An audit committee is directly responsible for the selection, retention and oversight of the independent auditor. It can recommend or vet audit proposals from auditors. If the current external auditor has been working with the organization for several years, it’s a good idea to consider gathering proposals from new auditors on occasion to ensure that the most comprehensive service is being provided. During this process, the committee will review the auditor’s past performances, consider their fee against other proposals, and review the required forms to ensure that the auditor performs their duties thoroughly and on time.

The financial committee will be receiving the audit report, and therefore should not manage the process of vetting an auditor for themselves. The audit committee ensures that the organization’s finances are complete and above any suspicion.

Regular Activities of an Audit Committee

Besides ensuring that regular audits are performed correctly, there are other activities that an audit committee may complete in order to help your organization’s finances become more accurate and transparent. For example, an audit committee may:

  • Ensure that a comprehensive risk management process takes place regularly.
  • Review the nonprofit’s internal and financial controls on a periodic basis.
  • Review any litigation or other proceedings that the organization is party to.
  • Establish internal management policies that lead to proper segregation of duties.

To summarize, the audit committee is primarily concerned with the accuracy of the organization’s finances; the proper management of various risks; and the assessment of management and control throughout the upper levels of the organization.

The Value of an Audit Committee

Having an audit committee lends to the transparency of the organization to the outside world via reporting on the IRS Form 990. While not required, Part XII question 2(c) asks if the organization has a committee that assumes responsibility for oversight of the audit, review, or compilation of its financial statements and selection of an independent accountant. Also, if the organization changed either its oversight process or selection process during the tax year, it should be explained on a separate schedule (Schedule O). All Form 990s are available online by GuideStar.

In addition to your audit committee adding valuable support for your financial committee and in the area of risk management, they also support your entire reporting structure. By helping to define duties and set reporting procedures in place at the upper levels, the audit committee sets the tone for the entire organization.

To find out if your state requires your organization to undergo a financial audit, visit the Unified Registration Statement Website.

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