written by Eric Lampe

“The independent audit committee fulfills a vital role in governance. The audit committee can be a critical component ensuring quality reporting and controls, as well as the proper identification and management of risk… Its critical role as guardian of… integrity puts the audit committee at the core of the challenge of governance.” Report of the National Association of Corporate Directors Blue Ribbon Commission on Audit Committees

Why have an audit committee?
Fraud can exist within any size organization, no matter the amount of resources. Establishment of an audit committee helps to counteract potential fraud by an impartial review of operations and procedures. Also, a part of the nonprofits annual 990 tax return asks if there is an audit committee within the organization. This document is available to the public, and an answer of no can potentially detour donors form contributing to your organization.

Who is involved?
Audit committee members should be independent of management. This allows for objectivity in their responsibilities. Ideal members of the audit committee should come from the board of directors, members, donors, and the general public. There should also be a financial expert on all audit committees. Who can be a financial expert can be vague, but it is anyone that can add additional value to the audited financial statements in order increase understanding among the organization. The audit committee should consist of 3-6 members.

What is the purpose?
The audit committee’s main goal should be oversight, oversight in the financial reporting, risk management, and the audit. The audit committee should ensure adequate review of the audited financial statements, the 990, and other required documents. The audit committee is also responsible for the evaluating and hiring of the independent auditors. All communication between the independent auditor and the board of directors should travel through the audit committee.

When should they meet?
The audit committee should meet at a minimum, 2-3 times per year. Key meeting dates should be at the beginning of the audit and at the end of the audit. This allows the independent auditors to know what areas are important to look at for the organization and also gives the independent auditor a chance to present their findings. The audit committee should also be available during the audit to address issues that arise that need clarified for the independent auditors.

How does it work?
The audit committee should adopt a formal charter that declares the mission and goals of the audit committee. The charter should include responsibilities, timetables, criteria of a financial expert, and committee size.

Audit committees are essential to any nonprofit. Large and small entities have the ability to create audit committees, there just needs to be flexibility in how to organize the committee and members to ensure that the objectives of the nonprofit are met. Contact us if you have any questions about effective audit committees 417-881-0145.

To read another article about Getting the Most From Your Audit Committee, click here.

Additional information can be found at Nathan Wechsler & Company: Effective Audit Committees for Nonprofit Organizations