For nonprofits, deciding on a board committee structure can be a challenge. Often, the decision is solely based on the number of board members and their talents and expertise. Proper financial oversight, however, is important to the success of a nonprofit because it ensures that the organization is in compliance with applicable laws, is acting with integrity, and is being as transparent as possible with the public, stakeholders, and funders.
If you already have an Audit Committee you are ahead of the game. Many nonprofits rely on the Finance Committee, if they have one, or the Executive Committee to also serve as an Audit Committee. Having an Audit Committee that operates separately from the Finance Committee provides checks and balances on the financial decision-making process and helps to ensure that the organization’s fraud risk is minimized.
Read on to learn the specific roles for each committee and why having both an Audit Committee and a Finance Committee is best practice for nonprofits.
The Audit Committee serves as the Board’s liaison with the external auditor. The Audit Committee selects the auditor, meets with the external audit partner and team pre-engagement, and is the first body to review the preliminary audit report and meet with the external audit team after the engagement is complete. The Audit Committee brings audit concerns to the Executive Committee and ultimately recommends acceptance and approval of the final audit report to the Board of Directors.
Monitoring the annual financial audit is just one type of risk assessment that an Audit Committee may be concerned with. Other types of risk resulting from competition, revenue uncertainty, or data security, for example, should be reviewed by the Audit Committee, as well as the risk mitigation strategies developed.
The Audit Committee provides the first level of review and approval of the organization’s Accounting Manual, ensuring that the organization and Finance Committee are compliant with the internal controls and policies laid out in the Manual. The Audit Committee provides oversight of the Finance Committee to ensure that the Treasurer and Committee are exercising proper stewardship of the organization’s accounting and finance function.
Audit Committees ensure that all tax forms including the IRS 990, state and federal employment taxes, property taxes, and unrelated business income tax are filed on time and are disseminated appropriately.
On an annual basis the Audit Committee should:
- Engage the auditor and oversee the audit process
- Review recommended edits to and approve the Accounting Manual
- Meet with staff leadership to review organizational risk and mitigation strategies
- Meet quarterly with the Treasurer to review the activities of the Finance Committee
The first role of the Finance Committee is to regularly review the organization’s financial statements including the Statement of Financial Position, the Statement of Activities (compared to the same period for the previous year and compared to the current year budget), and ideally a Cash Flow Projection. The Treasurer should review financial statements monthly, and the Finance Committee at least quarterly. Any concerns regarding the financial health of the organization should be reported by the Treasurer to the Executive Committee and Board of Directors.
The Finance Committee should also ensure that the organization is following the internal controls and policies outlined in the Accounting Manual. A review of the preliminary budget and presentation of the final budget to the Board should be performed by the Finance Committee in advance of the beginning of the next fiscal year. If the organization is facing financial challenges, the Finance Committee should work closely with staff leadership to evaluate various scenarios and courses of action, and present viable options to the Executive Committee and/or Board of Directors.
During each fiscal year, the Finance Committees should:
- Regularly review financial statements
- Review annual budget preparation
- Ensure proper financial recordkeeping
- Notify Board leadership of significant financial concerns
- Meet quarterly with the Audit Committee
Understandably, not all nonprofit boards have enough board members to support both an Audit and Finance Committee. In that situation, it may make sense for your Executive Committee to assume the responsibilities of the Audit Committee. For those nonprofits that can support both, these committees will act in tandem to ensure the financial stewardship, compliance, and transparency that stakeholders and funders desire.