The Audit Committee’s Role in Your Nonprofit Board

September 11, 2019 | Article

Establishing an audit committee in your nonprofit can result in multiple benefits for your organization. The role of an audit committee can go beyond their primary functions of meeting with the external CPA firm, reviewing financial statements and going over Form 990s. The team can also provide lesser-known functions that assist your company in upholding efficient internal processes. More efficient processes can translate to better experiences for your staff, a better product being produced and overall longevity for your business.

An audit committee is one of many ways you can set your nonprofit board up for success. We broke down a few other key ways to keep your board performing at its best.

What is an audit committee?
The audit committee can serve several purposes for your organization and is just one way to ensure you have a smooth audit process. Outside of standard duties, they can help with the following activities:

  • Participate in overall risk assessment of the organization and suggest methods to mitigate risk.
  • Be familiar with the system of internal control, specifically with respect to segregation of duties, to evaluate adequacy of controls.
  • Ensure that recommendations from the external audit firm are being implemented.
  • Safeguard and assist in implementing a whistleblower policy.
  • Review any conflicts of interest between the organization and employees or board members.

How do audit committees help nonprofits?
Enforcing your whistleblower policy is just one way an audit committee can help your firm mitigate risk. A strong whistleblower strategy not only encourages speaking up but also protects staff who come forward with information on illegal practices or violations of internal policies. Your audit committee can provide a safe environment in your firm to ensure that individuals feels protected from retaliation. Implementing a whistleblower policy and a committee to enforce a protective strategy is vital to encourage staff to report any wrongdoing or malpractices they may come across.

To be effective, the reporting process must incorporate features that ensure confidentiality of those reporting their concerns. The audit committee must also ensure all employees are confident they will be protected from retaliation.

A sound whistleblower policy contains components such as the following:

  • A flowchart of the reporting communication chain so all employees know who their primary reporting person is. This chart should include information regarding the persons involved in the receipt, handling and disposition of complaints, including the role of the audit committee. Additional information should be included for any concerns involving top management, as these reports will require a different communication chain (such as directly to the chair of the audit committee or to internal counsel).
  • Confidentiality safeguards that ensure anonymity of individuals communicating concerns, as well as the methodology for making an anonymous report.
  • Information regarding how reported matters are investigated; for example, are all reports communicated to the audit committee? You might also consider having a process by which the disposition of concerns is communicated back to the reporting party (which is obviously not possible if concerns are anonymously reported).
  • Safeguards regarding confidentiality, and perhaps a process used to investigate suspected retaliation against reporting parties.

Other matters to consider include:

  • Developing a process for internal audit of the whistleblower program to insure the operating effectiveness of the protocols.
  • Observing retention policies regarding documentation, investigation and resolution of reported concerns.

The importance of establishing a strong whistleblower policy cannot be over-emphasized. Of equal importance, however, is the knowledge such a process exists. It is imperative that employees recognize that their concerns are being communicated and that appropriate investigative steps will be taken to resolve them. While developing your policy, consider having all employees annually sign a statement outlining that they are aware of the policy and are following established protocols.

What other things do you need to consider when it comes to the audit of your nonprofit?

What does the audit engagement timeline look like?
With respect to the annual audit engagement, the committee should follow a reasonable timeline for necessary discussion. The following outlines a suggested timeline.

Three months prior to year-end: Update the committee’s risk assessment of the organization and meet with the audit firm for discussion. At the same time, discuss the engagement timeline with management and the audit team to ensure deadlines will be met.

During the audit engagement: Monitor the timeline and any audit-related issues that arise that could affect completion of the audit engagement and preparation of Form 990. Be informed of any audit adjustments identified during the audit process that could change internal financial results reported by management.

Following engagement completion: Interview both the external audit team and management about the audit experience and any improvements that should be made to the engagement for the current year. Also, discuss whether changes to accounting or reporting standards will modify the audit or Form 990 preparation engagement. Finally, consider any recommendations from the external audit firm and discuss with management how the recommendations will be implemented.

As you can see, the role of the audit committee within the nonprofit organization is primarily one of risk oversight. The committee’s goal during interactions with both management and the external CPA is to monitor risk and assess the quality of external reporting by the organization.

A key to a successful nonprofit audit is understanding auditor rotation.

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