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Feb 13, 2014

Corporate Governance: A Primer for Not-for-Profit Audit Committee Members

Featuring Kevin Ryan

An effective audit committee can help not-for-profit organizations meet their accountability goal

Gone are the days where not-for-profits can squeak by with having weak internal controls. Since Sarbanes Oxley was passed more than a decade ago, corporate governance has been trickling down to not-for-profits from the assurance requirements laid out for public companies. Regardless of budget size and scope, not-for-profit organizations need to be implementing audit committees and making sure members understand their roles and responsibilities.

Why Create an Audit Committee?

Not-for-profit organizations face frequent criticism for having weak internal controls due to understaffing, poor training and lack of segregation of duties. These factors and a greater focus on stronger fiscal accountability in the last several years have prompted not-for-profits to compensate by establishing audit committees. This development has thrust philanthropic individuals who typically may not be financial watchdogs into a realm in which they may not be familiar or comfortable.

While some organizations still need to be convinced they need an audit committee, many others find creating one has become a key aspect to their systems of governance and internal controls. A critical function of the audit committee is to oversee an organization’s internal controls and risk management procedures. To carry out that function, the audit committee will meet with both the not-for-profit’s management and auditors to gain an understanding of the significant risks and exposures facing the organization. It is also important to understand how the organization is reducing its exposure through adequate internal controls.

An effective audit committee has many benefits. Aside from helping not-for-profits meet their accountability goal, it can improve financial practices and reporting, prevent fraud, and enhance external and internal functions.

Embracing Financial Responsibility

The audit committee becomes an extension of the board – it assures proper management is in place. Committee members mentor senior staff as well as hire, evaluate, and interact with the independent auditors and counsel. Both the audit committee members and board members have the same fiduciary duty benchmark to meet, which is to illustrate the level of care “an ordinary prudent person would exercise in a like position under similar circumstances.”

At least one member of the audit committee should be considered “financially literate,” meaning the individual must understand the following:

  • Financial statements - the revenue recognition issues involved and how business decisions impact them;
  • Financial and balance sheet risks
If that type of person is not already a member of the committee, then an outside consultant should be retained to fill the void. A best practice is to describe these topics in a document called the audit committee charter. An effective charter will describe how many members will serve and what is considered a quorum for conducting business. It will also provide guidance on how often the group should meet. It’s critical that members be independent with no conflict of interest to ensure objectivity and impartiality.

For further assistance in evaluating the effectiveness of your not-for-profit’s audit committee, feel free to contact Kevin Ryan at 215-545-4800.