How to Make Your Nonprofit Audit Committee More Impactful
Audit committees for nonprofit organizations are charged with filling a very important and broad fiscal and financial accountability and governance oversight role. Most nonprofit audit committees center their attention on the back-end of the annual financial statement audit process when they receive draft auditor reports. While this is an important function, audit committees can be more impactful if they shift more of their focus to the front-end of the annual audit process and expand their internal control and business practices oversight roles.
The American Institute of Certified Public Accountants (AICPA) offers a compelling statement of why audit committees are needed:
“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 a 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.”
Audit committees contribute to nonprofit “fiscal accountability and governance” through their most recognized role of receiving draft auditor reports and recommending whether the Board should approve or not approve these reports. However, there are many more opportunities to leverage “the knowledge and experience of audit committees.”
The following are three basic tactics that can be used to improve audit committee impact and effectiveness.
First, expand the audit committee meeting schedule so it is meeting on a regular basis throughout the year. Most audit committees only meet during external audit process. Plan to meet quarterly (4 times a year) or semi-monthly (6 times a year) and adding additional meetings as necessary. A meeting schedule like this emphasizes that the work of the audit committee is both operational (important to infrastructure and business practices) and continuous (constant without breaks).
Next, add an audit planning calendar that highlights the three key audit committee meeting dates with the external auditors: pre-audit planning meeting, risk assessment meeting before the start of fieldwork, and concluding presentation of audit reports meeting.
Stress that the first two meetings are just as important as the final meeting where audit reports are presented. By shifting the audit committee’s attention to the first two meetings with the external auditor, the audit process will be more efficient and back-end surprises will be limited.
Design the first meeting to concentrate on introductions, scheduling of key deliverable dates, and protocols for communications and information sharing. Schedule this meeting early before the end of the fiscal year. This will make the audit process more efficient and eliminate potential misunderstandings and communication errors.
The second meeting is reserved for risk assessment discussions and sharing changing operational information. This meeting is usually scheduled before fieldwork starts and is where the audit committee and external auditors share internal control concerns, activities and transactions of an unusual nature, and changes to operations. Active two-way sharing of information on the front-end of the audit process will improve understanding, trust, and confidence.
Conclude by exploring added internal control and business practices oversight roles for the audit committee. Go slow here. Most nonprofit audit committees are only used to oversight roles related to the external audit. Moreover, some organizations that have other committees actively involved in the drafting and implementation of internal control procedures and other governance policies may not realize the importance of the role of the audit committee whose purpose is dedicated to oversight. As stated by the AICPA above, oversight of internal controls and business practices is an essential component of “fiscal accountability and governance,” and this would benefit greatly from the experience and expertise of the audit committee.
Start by adding an annual meeting between the finance department and the audit committee to share information to assess internal control system status, potential fraud risk exposures, and changing operations. Over time, the audit committee can consider taking on additional other roles related to oversight of ethics compliance, whistleblower reporting processes, and timely financial and budget reporting, to name a few examples.
Planning Tip – Schedule an orientation meeting when a new audit committee is seated to help ensure that committee members fully understand and better embrace their oversight responsibility role. Without these orientations, audit committee members can be caught off-guard by the complexity and scope of their new fiduciary oversight role. Make sure to include in the audit committee orientation a listing of the scope of their oversight work. Highlight and explain that the committee is not just there to oversee the external audit but also there for other oversight responsibility roles related to internal controls and business practices.
An audit committee that remains engaged and active throughout the year will have more opportunities to report to the Board, interact with staff, and message to constituents that the organization is benefiting from regular observation and assessment of operations and business practices demonstrating that the organization takes accountability seriously.
