Today, not-for-profit organizations face more public scrutiny than ever before, and many organizations are placing an emphasis on transparency to retain or attract donors. While IRS regulations require organizations to share the information submitted on Form 990 with the public, most organizations choose to share additional information such as fundraising data, performance measures, and governance policies. A nonprofit audit committee can be an important part of any organization’s governance structure. Think of an audit committee as an intermediary between the organization’s external auditor and the management/leadership of the organization.
Many organizations have questions about forming an audit committee–or the roles and responsibilities of the committee members—so CRI’s not-for-profit CPAs have compiled a list of the three most common questions we’re typically asked about audit committees.
1. What exactly is a nonprofit audit committee, and what are its responsibilities?
Depending on the organization, an audit committee may take on many different forms and address several different facets of the organization, but typically the audit committee will focus its efforts in the following areas:
- Integrity. Specifically, integrity is vital in relation to the organization’s financial statements. The audit committee realizes that, in large part, the organization’s reputation relies upon the accuracy and transparency of financial activities.
- External auditor evaluation. Qualifications, independence, and performance of the external audit firm should be evaluated by the audit committee.
- Internal audit/internal control system. The audit committee is responsible for oversight of the organization’s internal structure and should not be a part of day-to-day management.
- Compliance. Compliance is the oversight of the organization’s compliance with various legal and regulatory requirements. This component can be important in many areas–including grant agreements, federal funding, and employment law.
- Review of IRS Form 990. Often, members of the audit committee review Form 990 or share the responsibility with management. Form 990 must be made available for public inspection by law, and it is very important that it accurately presents the activities of the organization.
2. How do you determine who would make a good nonprofit audit committee member, and why?
Audit committees vary greatly by the nonprofit organization based on factors such as organization size, diversity of funding sources, complexity of financial statement elements, geographical footprint, and stated mission. When creating an audit committee, consider the following minimum criteria:
- Three members. Of course, there can be more, but three committee members deliver the flexibility required to address the organization’s needs.
- One voting board member. It makes a lot of sense to have a designated member of the primary governing body sit on the committee.
- One member with financial expertise. Organizations may fill this need by recruiting an external volunteer. This member does not necessarily have to be a Wall Street mogul; it should be a person that is familiar with reading/understanding financial statements, evaluating internal controls and their functionality, and addressing unique organization financial issues.
3. What should the nonprofit audit committee do?
Specific tasks can vary greatly based upon each individual organization, but an annual audit committee calendar might include many of the following tasks:
- Review of financial policies and procedures. Remember, the audit committee is concerned with things like integrity, governance, internal control, and compliance. Reviewing financial policies and procedures helps ensure the organization is meeting objectives. Key policies should include conflicts of interest, whistleblower, financial controls, and record retention.
- Meeting with management. Financial statements may contain sensitive issues, significant estimates, or judgments. It’s important that the audit committee is aware of these items and understands management’s position related to them.
- Evaluation of external auditor. This task may include request for proposals from several audit firms or simply an evaluation of the continuing external auditor. Either way, this process normally results in an audit committee recommendation to the board of directors to engage an audit firm.
- Entrance meeting with external auditor. This meeting opens the lines of communications between the external auditor and the audit committee. Typically, any significant current year audit issues are discussed, and a timeline for the audit process and key reporting dates are established.
- Exit meeting with external auditor. The external auditor presents the audit process results to the audit committee. Discussions should include the auditors’ opinion and the organization’s financial statements–as well as any internal control deficiencies noted during the audit.
You’ve Got Nonprofit Audit Committee Questions, CRI Has Answers.
If your not-for-profit organization is interested in establishing an audit committee or further developing an existing audit committee, then contact CRI’s nonprofit CPA team. We can help you navigate the many decisions related to the formation, structure, and function of an audit committee.