What’s the difference between an audit and a finance committee?

The latest view on not-for-profit accounting issues

As nonprofits grow and start receiving more donations, the need for a finance committee and/or audit committee becomes more necessary. These committees are created in addition to the board of directors, not in replace of. So what’s the difference between an audit and a finance committee and how do you choose which one works best for your organization?

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The Finance Committee is a common committee created separate from the board of directors for the financial oversight of a nonprofit organization and works with the board of directors and staff to monitor the organization’s finances. It helps ensure financial matters are efficient, legal and in line with the nonprofit’s mission which protects the organization.

The Finance Committee typically focuses on the organization’s financial reporting and budgeting processes. The committee is often chaired by the treasurer and made up of members from the community who have a financial background and sometimes, one or two members from the business department of the organization.

Common responsibilities of a Finance Committee:

  • Approve and review the annual budget
  • Monitor financial transactions
  • Monitor debt
  • Ensure financial reporting requirements are fulfilled
  • Expend funds according to donor’s requirements
  • Advise the board on significant financial decisions

The Audit Committee members share the same fiduciary duty as board members and are the responsible parties to interact with the independent auditors. Audit Committees help alleviate some common criticisms brought about by understaffing, inadequate training and lack of segregation of duties to oversee the organization’s internal controls and procedures. It also verifies the organization’s financial process and system of internal controls to be in compliance with the laws, regulations and industry best practices.

At least one member of the Audit Committee should understand financial statements, financial risks, the impact of business decisions on the financial statements, revenue recognition issues on the financial statements and be able to identify balance sheet risks.

Common responsibilities of an Audit Committee:

  • Oversee financial reporting – receipt, monitoring, and distribution
  • Confirm financial transactions go according to policies and procedures
  • Ensure independent oversight for the audit

If you have any questions about the the difference between an audit and a finance committee or would like help in choosing which one to create, contact your Henry+Horne advisor.

Laura Williams