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Most nonprofit board members have idealistic notions of their responsibility to their organization: promote the mission, assist with fundraising and volunteer recruitment.  However, the board’s first order of business should be to form an audit committee.  “Audit” can be a frightening word to non-financial people but it doesn’t have to be.

Why Does Your Organization Need an Audit Committee?

In addition to the “feel-good” activities such as fundraising and promoting the organization, a nonprofit board is also accountable for financial matters and making sure they are “conducted legally, ethically, and in accordance with proper accounting rules” (Final Report of the Panel on the Nonprofit Sector).   An audit committee can assist the board in this endeavor by being responsible for selecting an auditor, overseeing he auditor’s activities and accepting the audit. The audit committee can also set standard practices for processing complaints concerning financial practices. 

In addition to the audit committee’s role with regard to the audit, its responsibilities include the following:

?      Understand the organization’s internal controls and have policies in place to update them as needed.

?      Make recommendations necessary to improve the organization’s efficiency and/or remedy problems identified by the committee or others.

?      Identify and monitor related party transactions and review the conflict of interest, ethics and related party disclosure policies periodically and update as needed.

?      Monitor any legal matters that could impact the financial health and reporting of the organization.

?      Ensure that proper federal and state tax filings are completed timely, including payroll taxes, sales taxes and unrelated business income taxes.

?      Additionally, audit committees may oversee compensatory reviews of executive level staff and protect whistle-blowing employees who raise concerns about serious accounting and auditing irregularities (National Council of Nonprofit Associations, 2005).

Does Your Organization Need an Audit Committee?

GuideStar.org recently conducted a survey of its newsletter recipients regarding changes made in response to the Sarbanes-Oxley Act.  The number one adjustment made by survey participants was the formation of an audit committee (55%).  The Final Report of the Panel on the Nonprofit Sector recommends that “every charitable organization that has its financial statement independently audited, whether legally required or not, consider establishing a separate audit committee of the board. If the board does not have sufficient financial literacy, and if state law permits, it may form an audit committee comprised of non-voting, non-staff advisors rather than board members.”  In the June 2004 hearing of the Senate Finance Committee entitled, “Keeping Bad Things from Happening to Good Charities”, one of several recommendations was the formation of an audit committee. 

Who should be on the audit committee?

In organizations with small boards, the entire board may serve the function of the audit committee.  Furthermore, audit committees may be inappropriate for charitable organizations that are organized as trusts rather than as corporations.  For larger organizations, it is more suitable to create a separate audit committee that can devote its attention to this area.

Whatever form the audit committee takes, at least one member should have an understanding of financial matters and should be comfortable reviewing financial reports and other financial records. No member of the audit committee should ever be involved in any conflict of interest transaction. The audit committee should be familiar with the organization’s internal controls and report to the board as appropriate the adequacy of the internal controls and any concerns raised by the staff or outside auditors.  Also, a nonprofit organization should think about including one or more non-board members on the audit committee in order to enhance its independence further.

Remember, the process of forming and administering an audit committee is considerably less painful than dealing with financial mismanagement.  If you would like additional information or assistance with audit committees or any other Sarbanes-Oxley related issues, please contact Albrecht, Viggiano, Zureck & Company, P.C. at 631-434-9500 to set up an appointment.