Got committees?
Add one more to your list

How many committees does a nonprofit organization really need? Most have finance committees, investment committees, grant committees, budget committees and compensation committees. But now, due to increased public scrutiny, you may be required to add one more: an audit committee.

The snowball effect

To strengthen public confidence in the financial reporting of public companies, the federal Sarbanes- Oxley Act of 2002 requires public companies to have audit committees to oversee corporate governance. Nonprofits are now beginning to feel the trickle-down effect of this law.

For instance, some states are starting to require certain nonprofits to have audit committees. In 2004, California lawmakers started the trend by passing the California Nonprofit Integrity Act, which requires all not-for-profits with gross revenue of $2 million or more to have an audit committee. Several other states are considering similar legislation, while others have had the proposals defeated.

Audit committees may be small or large based on the needs of your not-for-profit. The purpose is to enhance accountability for the nonprofit’s financial reporting — not to obstruct operations. Even if your organization isn’t required to have an audit committee, you may want to consider one.

Financial know-how a must FOR COMMITTEE

An audit committee typically is responsible for selecting the organization’s independent auditor. Plus it oversees the audit process and evaluates the audited financial statements and management letter. Committee members need to understand the nonprofit’s purpose, its major programs, the management structure and board governance, along with the systems in place for accounting, financial reporting and regulatory compliance administration.

Moreover, to prevent financial statement errors, fraudulent financial reporting, violations of laws and regulations, and possibly the misappropriation of the organization’s assets, the audit committee must review the nonprofit’s operations and internal controls. It’s critical that members have a basic financial knowledge so they can understand where mistakes — intentional or not — could occur and design and implement internal controls to mitigate those risks.

Committee members must also be able to knowledgeably converse with the auditor on audit standards and any issues discussed before retaining the auditor, as well as those arising from his or her report, including:

• Significant accounting policies,

• Accounting estimates,

• Audit adjustments (along with unrecorded adjustments),

• Disagreements with management,

• Consultations with other independent auditors, and

• Difficulties encountered while performing the audit.

It’s management’s responsibility, however, to select and use appropriate accounting policies and to base accounting estimates on its collective knowledge and experience.

Why you may want to add one

You may be wondering why you’d want to add another committee if it’s not required. While there are several good reasons to have an audit committee, one is paramount: public perception. If a potential grantor asks about your nonprofit’s financial controls, you can respond that your organization takes financial accountability seriously and has a separate committee — the audit committee — to oversee the preparation and audit of the financial statements.

Moreover, an audit committee confirms your organization’s commitment to “doing it right,” by adding a level of transparency in the accounting and audit processes and improving accountability. In addition, your accounting personnel will be more likely to double-check their work to avoid a discrepancy being noted during the audit. 

A final note

Creating an audit committee that is independent from your board and other management committees will help raise the bar of your organization’s governance by eliminating conflicts of interests and instilling confidence in your constituents and prospective donors. •