Does Your Organization Need an Audit Committee?

We have previously discussed in several issues of our Legacy Advisor, Not-For-Profit Organizations, the limited direct impact that the Sarbanes-Oxley Act (SOX) has had on nonprofits.  However, many forward thinking nonprofits are asking themselves what other parts of the SOX they should consider enacting as a part of best-practices.  In fact, the Attorneys General of several states have already implemented some Sarbanes-like reforms.  Others are still in the studying stage.  One recent trend is to adopt an audit committee structure. 
 
Some of the duties of an audit committee follow:
  • Engage the auditing firm
  • Review the audit with the auditor
  • Present the audit to the Board with its recommendation as to whether or not to accept it
  • Provide an outlet for confidential reporting of any impropriety suspected by an employee without fear of management's retribution (whistleblowers)
  • Review the appropriateness of major accounting and internal control policies
Some major characteristics of an audit committee:
  • Should have at least one member of the Board (preferably more than one)
  • Should have at least one "expert" in the field on non-profit accounting/auditing (you may consider engaging such an individual if none are available from your volunteer base)
  • Should meet several times a year
  • Staff members normally do not serve on the committee
  • Boards with high turnover may consider longer terms to retain institutional memory
There are some pros and cons to adopting this structure.  If implemented correctly, an audit committee should provide the Board with a clear independent voice to address financial matters.  It establishes that the auditors are neither engaged by nor report to management, but rather, the Board, through its audit committee.  The committee members will need to devote the time and develop the expertise to monitor effectively increasingly complex financial practices.  Many nonprofits will find it difficult to populate such a committee with qualified individuals.  If you create an audit committee, it has to actually “do” what it is designed to do.  Also, members of an audit committee face strong fiduciary responsibilities, though its presence does not diminish those of the Board itself. 
 
Another alternative to consider is to augment the mission of an already standing finance committee.  Such a committee may already possess individuals with the knowledge necessary.  If this is the direction you wish to take, the Board would need to pass a resolution empowering the committee to do such work and the committee name should have "audit" in it; for example, “finance and audit committee.”  The drawback to this approach is that if the finance committee makes major financial recommendations, the same committee would not be able to independently review these decisions.
 
Once again, having an audit committee is not a requirement for nonprofits, but in today's marketplace, with its heightened scrutiny, everyone should explore all alternatives to best safeguard the resources that you have been entrusted with.  This is only a snapshot of some of the considerations involved.  For more information, we recommend that you speak to your auditors and your attorney.  If you want to discuss this topic, please feel free to contact us.
 
By Bob Grogan, CPA, Chicago office
rgrogan@legacycpas.com