Building an effective audit or finance committee is an important governance tool for not-for-profit organizations. An effective audit or finance committee protects your organization’s reputation by ensuring financial integrity and reinforcing donor confidence. Members should provide independent oversight of financial reporting, risk management, internal control and ethics, along with their responsibility of overseeing annual audits for the organization.
What Are Key Elements of an Effective Audit or Finance Committee?
- Independence from Management
Your audit or finance committee should be comprised of members who are not involved in day-to-day operations. An independent committee can be objective and oversee financial reporting of your organization without influence from management and leadership.
- Financial Expertise
Your audit or finance committee should include members with strong financial literacy and accounting expertise. The members should understand financial statements, internal controls, auditing concepts, not-for-profit specific accounting and regulatory and compliance requirements. Not every member needs to be an expert in every accounting or financial area, but collectively the committee should have a grasp on complex accounting and auditing matters to be comfortable discussing.
- Common Size and Composition
Best practice for not-for-profit audit or finance committees is to maintain a committee of three to five members. This helps ensures diverse expertise and continuity, while remaining small enough for effective collaboration. At least one member should be designated as the financial expert, all committee members should be independent and should serve staggered terms to preserve organizational knowledge as membership rotates.
- Clearly Defined Roles and Responsibilities
Your audit or finance committee should have a formal definition of the committee’s authority, responsibilities, membership requirements and reporting expectations. This should be accomplished through a written charter approved by the full board. The charter formalizes the committee’s authority, requirements, term limits, meeting expectations and reporting lines to the board. The roles of an audit or finance committee typically include:
- Annual budget oversight
- Financial reporting
- Oversight of cash flow and liquidity
- Investment oversight
- Internal controls oversight
- Oversight of annual audit
- Review of Form 990
- Fraud prevention
- Financial and operational risk management
- Strong Oversight of the Audit
Your audit or finance committee is responsible for ensuring the external audit process is conducted timely and efficiently. Responsibilities related to the audit include recommending the selection of the independent auditor, reviewing the audit scope and timeline, discussing significant accounting estimates and judgements, review audit findings and recommendations, and monitoring management’s corrective actions from audit findings and recommendations.
- Focus on Internal Controls and Fraud Prevention
Oversight of internal controls is an important function of any audit or finance committee, but it is especially important for smaller not-for-profit organizations. Your audit or finance committee should periodically evaluate segregation of duties, cash handling procedures, authorization controls and grant compliance.
- Regular Meetings and Continuous Education
Your audit or finance committee should have a year-round meeting calendar to address financial topics that arise throughout the year. Discussions of the committee should not be limited to audit season, but should also include budget development and approval, review of quarterly financials, regular discussion of grant compliance, investment performance, and Form 990 review. Additionally, the audit or finance committee should stay on top of not-for-profit accounting standard updates issued by the FASB, as well as changes in IRS and grant compliance agreements.
An effective audit or finance committee is a key partner in helping the board fulfill its responsibilities, protect the organization, manage risk and support long-term sustainability. The most effective audit or finance committees go beyond reviewing the numbers and help organizations understand what the numbers mean, identify risks, and ensure resources are available to advance the mission.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.
