Not-for-profits may all have different missions, but a commitment to transparent and accurate financial reporting is something they all should have in common. Audit committees play a key role in providing governance and oversight of the financial reporting process. Here are some common considerations for building a strong and effective audit committee.
Can We Combine the Audit Committee with the Finance Committee?
Combining the audit and finance committees may seem like a practical and efficient use of both staff and volunteer resources and time, and it can be hard enough just filling the finance committee. However, it’s important to distinguish the different purposes these committees serve. The finance committee assists the board in making budgeting decisions, reviews monthly financial statements, and monitors internal controls. The audit committee is responsible for overseeing the annual audit and reviewing compliance with the organization’s financial policies and procedures. The audit committee also often serves as the body responsible for handling whistleblower complaints and conducting official investigations necessary in order to fulfill its responsibilities.
Although the finance committee could also act as the audit committee, it is considered a best practice that they be separate to provide the appropriate checks and balances. If the committees are combined, consider having two committee chairs to oversee the different functions.
Who Should Serve on an Audit Committee?
The board of directors should appoint audit committee members. Audit committees can be comprised of both board members and non-board members. All audit committee members should be independent of management and should be free of conflict of interest. At least one audit committee member should be a financial expert that understands the financial statements of the not-for-profit organization and can assess the competency of the auditing firm.
How Often Should an Audit Committee Meet?
Most audit committees meet two to four times a year. Two of those meetings are usually at the beginning and the end of the audit process. In the initial meeting with the auditors, the committee should review and provide input on the planned scope of work, key areas of audit risk, committee expectations, and agree on a timeline for meetings and deliverables. In the exit meeting, the auditors will discuss the results of the audit, report any internal control findings, and review the auditor’s “required communications” under applicable auditing standards. Other meetings might be needed throughout the year to address audit findings, respond to internal or external complaints, or perform other oversight functions such as reviewing the IRS Form 990.
What Questions Should be Asked in an Executive Session?
It’s recommended that an executive session be a standing agenda item. An executive session is a meeting within the board meeting where the CEO and other management are excused so that the board members may address the auditors in confidentiality. In most cases, the auditors will not have anything further to report that could not have been said with management present, but it does give them an opportunity to be more candid regarding any difficulties or additional concerns they might have.
Executive sessions are also a great opportunity for committee members to ask the auditors questions that will provide further insights into the audit and financial reporting process. Often, committees struggle with knowing the right questions to ask. To aid with this, the AICPA has developed a “Sample Questions for Executive Session” tool. Some of the questions will already be addressed in the auditor’s report, but others often go unaddressed unless specifically asked.
A strong, effective audit committee will help your not-for-profit maintain financial integrity and achieve its charitable mission. Following the tips above will keep your audit committees functioning and your organization in good health. If you have any questions about the role of the audit committee or how to improve its function, please send me an email.
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