Effective Finance Governance Protects Your Organization
Unlike public companies, an audit committee is not required by not-for-profit boards. In fact the Stanford Graduate School of Business 2015 Survey on Board of Directors of Nonprofit Organizations found a surprising 42 percent of not-for-profit organizations don’t have audit committees. If your organization is among that 42 percent, think seriously about creating an audit committee or assigning these all-important functions to another committee (e.g., finance committee).
Good audit and finance committees help ensure financial integrity, limit risk, and protect your reputation with regulators and the public. Most importantly, they help ensure good governance. Finance committee responsibilities include monitoring the organization’s budget and approving the distribution of its financial resources. Duties specific to the audit committee include oversight of:
• Financial reporting
• External and internal audit
• Compliance with legal and regulatory requirements
• Internal controls
• Form 990 review and filings and other reporting to regulatory agencies
• Recommendations in response to audit results
• Deciding whether a second opinion is required to resolve auditing issues
Ultimately, the audit (or finance) committee members are responsible for ensuring that all financial reports are accurate and portray your organization’s condition and performance transparently. Additionally committee members should look for signs of fraud — such as unreported revenue — in your organization’s financial statements.
Internal and external auditors
Finance and/or audit committee members regularly interact with the internal and external auditors. They approve the annual internal audit plan and review the internal auditors’ reports. Your committee members also may be responsible for approving the appointment of the internal audit head. Committee members are also responsible for hiring, compensating and overseeing the external auditors as well as being their point of contact. Your committee members should regularly communicate with the auditors. For example, hold pre-audit meetings to discuss the work plan, request regular updates during the audit and conduct post-audit discussions to review findings before you present them to your board.
Controlling risk
An audit committee function that sometimes goes unmet by a finance committee relates to risk management. Committee members should ensure that specific measures are in place to reduce your not-for-profit’s risk profile by conducting a comprehensive risk assessment to identify financial vulnerabilities such as those related to investment practices, antifraud policies, insurance coverage, and compliance with laws, regulations and donor and grantor requirements. And your committee members should take the lead in ensuring that internal controls are effective in minimizing those risks it identifies as the greatest threats.
Ideal committee members
The composition of finance and audit committees might vary, but one thing is certain — most members should have strong financial expertise including a working knowledge of financial reporting (including Generally Accepted Accounting Principles) and internal controls. Specific knowledge of not-for-profit-sector accounting and financial reporting issues is valuable too.
In addition, the American Institute of Certified Public Accountants recommends that at least a few committee members also serve on the board of directors. However, some states limit the number of audit committee members who may also serve on the board. And also be aware that appointing your board treasurer to the audit committee may create a conflict of interest, because the audit committee is responsible for independent monitoring of financial results.
Above all, committee members must maintain their independence.
We can help
The best advice we can offer is: “Don’t go it alone.” Ciuni & Panichi, Inc. has a dedicated team of professionals available to provide financial services including audit, accounting and 990 Form filings and a consulting practice to help you enrich and engage volunteer committees including the finance and audit committees. To learn more, contact Michael B. Klein, CPA, Partner-in-Charge of the Not-for-Profit Group at 216-831-7171 or mklein@cp-advisors.com.