It is a known fact that audit committees are an essential component in corporate governance. The public has been increasingly focused on oversight and governance issues since the Enron scandal. However these issues aren’t just for the “for-profit” industry. It is becoming more and more of an issue for the not-for-profit world. Since the re-vamp of the Form 990 there has been a real focus for providing transparency and accountability. One way a not-for-profit organization can do this is by taking proactive steps to improve their oversight process, which includes developing an audit committee. We learned in our May Lunch & Learn about Best Practices in Not-for-Profit Organizations that one common best practice noted by the IRS, the Better Business Bureau and the Piper Charitable Trust was development of an audit committee.
Some of you may ask “what’s the difference between a finance committee and an audit committee?” There are significant differences. The purpose of a finance committee is to monitor and provide guidance on the Organization’s financial matters. This involves reviewing the monthly financial statements, assisting management with preparing the budget and managing investments.
An audit committee is responsible for providing oversight over the organization’s audit and other areas involving financial management. This group serves a key role in helping the board fulfill its fiduciary responsibilities in overseeing the organization’s finances. Responsibilities of the audit committee may include the following:
• Oversee the hiring of the auditors, including communicating with the auditors regarding the audit process, timing, issues, etc.
• Assess business and fraud risk for the organization and determine plans to address these risks;
• Monitor accounting policies;
• Monitor the internal control process;
• Establish policies to prevent fraud, including developing a whistleblower policy.
The audit committee may be composed of board members although not all audit committee members need be board members. Also, audit committee members should not include members of the finance committee or any employees of the organization, as this may cause a conflict of interest.
Effective oversight of any not-for-profit organization rests with its board of directors. Board members must be committed and informed of the organization’s responsibilities to its grantors, donors and the people they serve as they may face potential legal liabilities if they fail in their fiduciary responsibilities. The primary role of the audit committee is to provide independence in communication and oversight relating to the audit process, which helps to ensure accurate financial reporting. As more scrutiny has been placed on not-for-profit organizations, and greater transparency and accountability has been required, the role of the audit committee proves to be very important.
For more information about audit committees, check out this article on effective audit committee member habits