Knowledge and Insights

Does Your Audit Committee Have What It Takes?

For-profit companies are always searching for ways to improve their efficiency and productivity—otherwise known as the “bottom line.” Nonprofit organizations have the same needs. Similar to public corporations, the board members plays an integral role in achieving these goals. That is why great care must be taken when selecting members. Members must possess the skill and expertise to complement your organization’s programs; and overall mission, and more importantly, they must understand the complexities of financial statements.

Following is a breakdown of the knowledge audit committee members should possess:

The Committee’s Role

The board members, not an outside auditor, are responsible for overseeing financial management and establishing internal controls and other oversights. Members are required by law to exercise specific duties of care, loyalty, compliance and financial oversight, thereby protecting a nonprofit’s tax-exempt status. Sound fiscal management is one of the board’s more critical duties.

The board should carry out its duties and protect your nonprofit—and itself—from breach of fiduciary duty by establishing an audit committee. Unfortunately, many nonprofit boards do not have an audit committee, either because they mistakenly believe their outside auditing firm will oversee their financial status or because they think financial improprieties would never occur in their organization.

Recent high-profile scandals emphasize the need for audit committees to aid in fraud detection and prevention. They can be your first line of defense, as long as committee members know what they are doing.

What Members Need to Know

Because of the committee’s oversight responsibilities, members must be financially literate. Individuals with accounting or related financial expertise should be selected. While a thorough understanding of generally accepted accounting principles or an extensive accounting or financial background is not necessary, at a minimum, members should:

  • Have a working knowledge of nonprofit financial statements, such as the statements of financial position, activities, functional expenses and cash flows, as well as each statement’s purpose. The ability to understand such information is vital.
  • Be able to differentiate between accrual and cash basis and to distinguish the differences between valuation methods, such as historical cost and fair value.
  • Know the nonprofit’s mission and specialty. Members must be acquainted with the organization’s niche and be aware of any regulatory changes that may affect the nonprofit’s ability to comply with those changes. This ability ensures that committee members can effectively fulfill their oversight responsibilities.

All of these are crucial qualities. A member’s commitment to your nonprofit, however, is at the core of their effectiveness. A devoted member should not only be committed but also have adequate time to devote to the committee’s work.

What You Need to Provide

In addition to being familiar with relevant financial accounting, reporting and regulatory developments, audit committee members must be aware of the economic outlook affecting an organization’s niche and any significant trends. To this end, you need to systematically and continuously provide members with sufficient background information and updates on current developments. Those developments can notably affect your operations and financial statements.