Should your Nonprofit have an Audit Committee?

By:  Karen Jessnon-profit_many hands-all in

To create a governance structure of accountability, a nonprofit needs board oversight for the audit function. Sometimes the full board is tasked with oversight for the audit.  Other times, managing the audit process becomes cumbersome for a large board and establishing a dedicated committee makes sense.  An effective audit committee assists the governing board in performing their fiduciary and oversight responsibilities for the nonprofit.

Some nonprofits use a standing committee such as an executive committee or finance committee to oversee this process. Depending on the size and complexity of the nonprofit, it may be beneficial to create a separate audit committee.

Guidelines for Establishing Your Audit Committee

Suggestions:

  • The committee should consist of 3-5 people
  • Members should have a good skills mix

Musts:

  • To ensure that the audit process is objective, no member of the audit committee should be employed by the nonprofit (or the audit firm). Having independence empowers the audit committee to make unbiased judgments about internal financial procedures, as well as the performance of the auditors. (Regardless of whether an audit committee is used, all charitable nonprofits should review their practices to ensure that there is independence in the oversight of the auditor(s).)
  • Members need to be knowledgeable about nonprofit financial matters.
  • The board should establish key responsibilities of the committee to ensure that the committee fully understand their roles and can be effective.

The Committee’s Role

An audit committee’s role typically includes:

  • Providing oversight of the financial reporting process, the audit process, the system of internal controls and compliance with laws and regulations.
  • Developing a good understanding of the nonprofits’ internal control over financial reporting.
  • Acquiring sufficient knowledge of the nonprofit’s risk assessment process so they understand how and where things may go wrong.
  • Working closely with the nonprofit’s staff to prepare for the audit.

In some circumstances, the audit committee may also be charged with the selection and oversight of the external auditors.

With the increased scrutiny that nonprofits face, an audit committee adds another set of eyes to assist the board with their governing responsibilities. Having members with the appropriate skillset to oversee the financial reporting process, the audit process, the system of internal controls and compliance with laws and regulations gives a nonprofit an additional level of transparency.  Should your nonprofit have an audit committee?

Additional Resources:

Eide Bailly’s Audit  Committee Checklist

Council of Nonprofit’s “What does an audit committee do?

 

Auditor Rotation: To Change or Not to Change

BethBirdBy:  Beth Bird

How often should you rotate your auditor? Many board members from publicly-traded companies encourage the nonprofit boards they serve to explore audit firm rotation as a best practice. But, is it a best practice?

The arguments FOR rotation include:

  • Audit objectivity. While there is not a standard for mandatory audit firm rotation, some believe it is necessary for audit independence.
  • A “fresh look.” Depending on organizational and environmental conditions, your audit may profit from new perspective.
    • The antidote for this argument is to ask your audit firm to rotate the engagement team – partner and/or staff. This allows you to retain the expertise, industry knowledge, and service you’re receiving from the incumbent firm, while adding the “fresh look” component you might be seeking.

The arguments AGAINST rotation include:

  • Increased costs. More costs may be incurred by the organization and its staff in the procurement process and initiation of a new firm. There may also be an increase in audit costs due to additional time spent in the first years of an audit relationship.
    • Of note: The Government Accountability Office surveyed hundreds of companies and auditors about audit firm rotation and reached the general conclusion that rotation increases costs and has very little, if any, effect on the quality of audits.
  • Decreased service levels. Some organizations notice that the level of service they receive from their current audit teams decline as the relationships comes to a close. This should not be the case, but it does happen occasionally.
  • Loss of existing organizational knowledge and relationships. Likely, your audit firm has a good handle on your industry and your organization. Starting from scratch when it comes to building relationships and bringing a new firm up to speed can feel daunting.

How do you determine what is best for your organization?

  • Ensure independence and objectivity. Ask yourself whether your current firm adheres to and performs in accordance with auditing standards. In addition, all firms are subject to a peer review process every three years to ensure the processes of independence and objectivity are followed. Ask your firm for its most recent report.
  • Look for participation. Is your auditing firm anxious to meet with your audit committee to discuss procedures, help them understand objectivity, and discuss any matters that have come to the auditor’s attention? Passionate auditors are valuable to the success of your organization.
  • Consider level and quality of service. If you are not receiving the level and quality of service you expect, discuss the issues with your auditors. If they are no longer able to meet your standards, a change may be in order.

If you’re still unsure about whether or not to switch auditing firms, check out the AICPA’s new Not-for-Profit Resource Center. Specifically, they have an Audit Committee Toolkit that includes a paper titled, “AICPA Not-for-Profit Audit Committee Toolkit- Evaluating External Auditors.”  This checklist will guide you as you consider the performance of your current auditors.