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
- The committee should consist of 3-5 people
- Members should have a good skills mix
- 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?
Council of Nonprofit’s “What does an audit committee do?”