Governance: Audit Committees

Requiring a board to have an Audit Committee is one element of the legislation being proposed by New York State Attorney General Eliot Spitzer in the effort to improve nonprofit accountability.

Regardless of whether this proposal becomes law, NPCC encourages organizations to create an Audit Committee if you have not already done so.

An Audit Committee provides a crucial link between the board and the independent auditor and serves a key role in helping the board to fulfill its fiduciary duty to oversee the organization’s finances. The accounting firm Eisner LLP has prepared a useful summary of what an audit committee should do, and with their permission, we reproduce it here.

An Overview of Audit Committee Responsibilities

The typical responsibilities of a nonprofit audit committee will encompass, but not be limited to the following:

Oversight of the independent audit function. The primary duties of the Committee in this area include:

  • a review of the proposed scope of the annual audit with the independent auditors. The Committee can also use this opportunity to request special investigations or an expansion of the audit into areas of concern to the governing board.
  • The approval of the independent auditors’ management report on the organization’s financial statement at the conclusion of the audit.
  • A review of the independent auditors’ management letter that emanates from the audit, as well as management’s responses thereto.
  • The recommendation to the board as to the appointment of the independent auditors.

Establishing policies and practices to prevent financial fraud. This includes a full understanding of the areas of risk as they relate to potential fraud within the organization, as well as accumulating the fraud-related findings of the independent auditors (and of the organization’s internal auditors, if there are any).

Ongoing understanding of the internal-control environment. The objective here is to ensure that controls are in place to provide reasonable assurance that assets are safeguarded, that transactions are authorized and properly recorded, and that the organization is in compliance with applicable laws and regulations. The Committee should have specific discussions about the control environment with both senior management and the independent auditors. The Committee should also periodically evaluate management’s compliance with the organization’s code of conduct and code of ethics.

Oversight of the financial-reporting process. The Committee should ensure that the frequency, distribution, and scope of the organization’s internal financial and accounting reports are appropriate to support management’s responsibilities for providing meaningful data and that the information contained is timely and accurate.

Budget control. In cooperation with other board committees, the Committee should ascertain that the annual budgeting process relates meaningfully to the organization’s financial reporting formats, and that budgets and subsequent budget-to-actual comparisons are completed in a timely manner.

Thanks to Julie Floch and D. Edward Martin. Eisner LLP Accountants and Advisors can be reached at 212-949-8700 or visit their website at www.eisnerllp.com.

This article originally ran in the May 2003 issue of New York Nonprofits, the monthly publication of the Nonprofit Coordinating Committee of New York, Inc.. www.npccny.org