Armanino Blog

Nonprofit Audit Committees: Roles, Responsibilities & Best Practices

by Jeff Owens
June 22, 2023

In nonprofit organizations that undergo an annual independent audit, boards often find that delegating oversight of the audit process to a smaller committee makes a lot of sense. While the entire board of directors has ultimate responsibility for the audit, a small committee (or even a task force that convenes just before the audit and disbands after) is typically more nimble, efficient and effective.

One advantage of a separate audit committee is its independence. The committee should comprise directors who are independent of the management of the organization. In some cases, nonprofit boards invite volunteers or others who are not board members. The committee’s independence allows it to be objective when assessing the organization’s financial procedures and staff members, as well as the performance of the auditors.

Note that, while your CFO and executive director cannot serve on the audit committee, they will be expected to attend audit committee meetings when requested. The full board of directors should monitor the committee’s performance.

Roles & Responsibilities

The audit committee’s main role is assisting the board in its oversight to safeguard the organization’s financial integrity. Key responsibilities include:

  • Reviewing the organization’s financial statements and other financial data, which are typically prepared by the finance committee
  • Overseeing the annual audit process, including hiring and communicating with the organization’s external auditors
  • Assessing internal controls over financial reporting, especially controls that surround high-risk areas such as donations, travel and entertainment, professional fees and executive compensation. This assessment should include verification that internal control systems are appropriately documented.
  • Reviewing annual information returns, such as Form 990
  • Overseeing compliance with all applicable laws and regulations and the organization’s code of conduct

The audit committee should meet as often as necessary to fulfill these duties. At a minimum, it should convene twice a year — once before the annual audit to discuss pre-audit plans, and once after the audit to discuss the audited financial statements and comments from the external auditors. Ideally, the committee will meet at least three times a year; many organizations adopt a bimonthly cadence for audit committee meetings.

Best Practices

If your organization has an established audit committee, the following checklist of best practices can help you evaluate how well your committee (and your board) is doing. Discuss any ‘no’ answers with the full board and management team and formulate solutions to remedy those gaps. If you don’t currently have an audit committee, you can use the list below as a guide to help your organization’s fledgling committee start off on the right foot.

Committee Members

  • Are committee members independent and objective?
  • Do they have strong interpersonal skills?
  • Do they address issues proactively and with integrity?
  • Are all committee members financially literate?
  • Is at least one member a financial expert with considerable experience analyzing, preparing or auditing financial statements?
  • If the committee doesn’t include a financial expert, has the board considered adding a CPA (someone not affiliated with the nonprofit’s audit firm) to the committee?

Committee Meetings

  • Does the committee meet three to six times a year?
  • Does management forward to the committee all relevant information — as well as information that should be added to the agenda — with plenty of time for members to review it before the meeting?
  • Are meetings long enough for the committee to thoroughly discuss all items on the agenda?

Communication With Management

  • Does the committee regularly apprise the CFO of key issues?
  • Does management keep the committee up to date on organizational changes, particularly turnover within the financial or management team or the external audit team?
  • Does the committee know how to effectively question, when necessary, management choices related to the organization’s finances and financial reporting?

Communication With the Full Board

  • Has the board clearly communicated to the committee its expectations of the organization’s key financial managers, including the CFO?
  • Does the committee provide feedback to the full board concerning the competency of key financial managers?
  • Does the committee report its proceedings and recommendations to the full board after each committee meeting?

Communication With Outside Auditors

  • Does the committee regularly schedule meetings with the independent auditors and communicate with them before, during and after the engagement?
  • Does the committee understand how independent and internal auditors will work together, and who will do what?
  • Are committee members able to relay that information to both sides and to the board accurately?

California’s Audit Committee Requirements Under the Nonprofit Integrity Act

In the wake of financial scandals involving large nonprofits as well as corporations, California enacted the Nonprofit Integrity Act of 2004. Among its many provisions is an audit committee requirement for charities with gross revenues of $2 million or more that file reports with the California attorney general. Schools, hospitals and religious organizations are generally excluded.

In an effort to ensure the audit committee’s independence, the act requires the following:

  • The committee cannot include any member of the staff, not even top management.
  • The committee cannot include anyone with a material financial interest in any entity doing business with the charitable organization.
  • The board of directors must appoint the audit committee, and the committee can include non-board members.
  • No more than 50% of the audit committee can be members of the finance committee, and the chair of the audit committee cannot be a finance committee member.

Different states have different requirements for independent audits and audit committees in nonprofit organizations. You can find a list of each state’s nonprofit audit requirements here.

Empower Your Audit Committee to Protect Your Nonprofit

The audit committee plays a crucial role in limiting financial risk, fraud potential and other threats to your organization. Make sure your audit committee has the proper structure and processes to perform its vital risk management functions. Reach out to our Audit experts today to get the support you need to comply with state requirements and safeguard your organization.

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Jeff Owens - Partner, Audit - Dallas TX | Armanino
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