Public companies are required to have an audit committee (due to the Sarbanes-Oxley Act of 2002), and while not required, many not-for-profit organizations have started their own committees as well. In order for an audit committee to be successful, both the organization and committee members must develop and fully understand the committee’s role and responsibilities.

An audit committee’s primary function is financial oversight, which generally includes financial reporting, responsibility for the external audit, legal and regulatory compliance and internal controls over these areas. The audit committee should take a much broader view, overseeing the conduct and integrity of financial reporting, including establishing and implementing accounting policies and internal controls to promote good financial stewardship. The goal is to protect the nonprofit’s assets, strengthen the reliability and accuracy of financial reporting, and reduce the risk of fraud.

On a practical level, financial oversight translates to:

• Reviewing Forms 990 and reporting to regulatory agencies;
• Looking for red flags in financial statements that might signal improper revenue recognition or other kinds of fraud (for example, unexplained fluctuations in revenues or expenses);
• Review and assess internal controls over financial reporting;
• Review, assess and manage the organization’s risk profile (investment practices, insurance coverage, compliance with laws and regulations, donor and grantor requirements, etc);
• Hiring, compensating and overseeing external auditors;
• Reviewing audit results, the organization’s responses and follow-up actions; and
• Evaluating the appropriateness of getting a second opinion on auditing issues.

Ultimately, the audit committee should ensure that all financial reports are accurate and transparently portray the organization’s performance.

An effective audit committee yields many benefits, including improved financial practices and financial reporting, reduction of fraud and other risks and allows for an efficient and effective external audit. In addition, an effective audit committee will allow other board members to focus their efforts in areas other than financial oversight.

If you are interested in developing an audit committee for your organization or looking to improve the effectiveness of your existing audit committee, please contact Charlie Burke at 312.670.7444 or [email protected].