Generally, summer months are busy for most nonprofit organizations, with the year-end financial close and preparation for the annual audit process. Through this process, the Organization’s finance and accounting teams are working to demonstrate to external parties their compliance with internal processes and controls and laws and regulations. To better ensure the Organization’s compliance, the Audit Committee provides assistance to the Board of Directors in the oversight of these activities.
The Audit Committee generally consists of a minimum of three independent directors, at least one of whom is a “financial expert”. Other key qualifications may include risk management expertise, and broad business and leadership experience. The responsibilities of the Audit Committee vary from organization to organization and should be documented in the Organization’s Audit Committee charter that is approved by the Board of Directors. The following list of responsibilities provides both required responsibilities and best practices for the Audit Committee members:
• Integrity of the Organization’s financial statements – responsibilities include review of critical accounting policies, practices and estimates, unusual items and complex issues, and audited financial statements, as well as management letter recommendations from independent auditors
• Oversight of financial reporting – responsibilities include the review of the adequacy of the entity’s system of internal controls
• Oversight of independent auditor – including the approval of services to be provided, proposed fees, as well as qualifications, independence and the performance of the independent auditor
• Oversight of the internal audit function
• Oversight of risk management and overall governance process – with the focus primarily on financial risk
• Oversight of the Organization’s ethics and compliance program – which include legal and regulatory requirements and review of IRS Form 990.
Along with the functions performed by the Audit Committee, the Board of Directors also relies on the work performed by the Finance Committee. Certain differences exist between the responsibilities of the Audit Committee and the responsibilities of the Finance Committee. In general, the Audit Committee makes sure things are done according to established policy with adequate controls and the Finance Committee monitors financial transactions. The Finance Committee provides guidance about what can be done and the Audit Committee ensures that independent oversight occurs. When defining the responsibilities of an organization’s Audit and Finance Committees, the entity should consider the structure and the complexity of the entity’s business model to find the most appropriate best practices to follow. Well-established and implemented best practices will help the organization achieve a great reputation in its community.