Success for not-for-profits (NFPs), regardless of their type or size, is built on a firm foundation of fiscal accountability and governance. Achieving these oftentimes elusive goals requires more than traditional business know-how and insights into industry and sector trends. It calls for a robust combination of strong internal controls, budgetary and legal compliance, accurate and timely financial reporting and disclosure, sound business practices, and culture of uncompromised moral and ethical behavior. NFPs can access expertise in all these areas – and in the process more successfully fulfill their strategic goals – by leveraging the knowledge and experience of audit committees. An effective audit committee can provide the following benefits:
1. Provide actionable insights to oversee and improve financial practices and reporting. In high-performing organizations, audit committees provide oversight. Audit committees meet with the CEO and financial officers to review and maintain the effectiveness of organizational controls and external financial reporting. They often work in partnership with the finance committee, which is typically focused on internal reports, operational issues, and financial strategy. For more tips on committee structure and considerations for delineation of audit and finance committee roles, view this AICPA background paper: Guide to Board Structure for Not-for-Profits (PDF).
2. Create and maintain effective anti-fraud programs. With their insights and expertise in financial, legal, management and operational issues, audit committee members can play a proactive role working with an NFP’s leadership team and auditors in creating and periodically reviewing organization-wide fraud prevention and detection program and ensuring that investigations are undertaken if fraud is uncovered.
They can also encourage the organization’s leadership team to establish a comprehensive ethics and compliance program. The audit committee should play a similarly proactive role in the review and update of both of these programs.
3. Enhance the internal audit function. An organizational structure that has the internal audit team reporting directly to the audit committee contributes to the overall integrity of the internal audit function. Under this structure, the internal audit team can serve as the audit committee’s “eyes and ears” regarding the organization’s ability to meet its financial and compliance responsibilities and ensure that the organization adjusts practices and internal controls as needed.
4. Oversee the organization’s external audit. An audit committee meets with external auditors to monitor their services and activities to ensure that independence is maintained between the external auditor and the organization’s management team. An audit committee also meets with external auditors to discuss their independent observations on management’s ability to maintain strong internal controls, appropriate financial reporting, and sound business practices.
5. Strengthen credibility with stakeholders. An NFP’s reputation is its greatest asset. An audit committee communicates a message of independence, reliability, and trust. It also builds confidence among present and potential constituents, donors, creditors, and other stakeholders. NFPs and their audit committees can maintain and further build on this positive message by disclosing the audit committee’s role and composition, achieving transparency in financial disclosures, and communicating the organization’s compliance and ethics policy.
Additional Resources An Ounce of Prevention: Combating Fraud in Not-for-Profits Board Responsibilities: An Overview for Not-for-Profits (PDF) A Guide to Reputation Risk Management for Not-for-Profits (PDF)