Q&A #177 – Must audited financial statements be formally approved by the governing body?
Question: My nonprofit organization is in the process of having our first annual audit of our financial statements. We expect to receive drafts of the audit reports soon and are planning to have the auditor present the audit reports and their findings at our next quarterly Board meeting. Does the Board need to vote to approve the audit reports? Or is it sufficient to have the auditor present the audit reports to the Board and address findings and questions?
Answer: Yes, a governing body of the organization must vote to accept (approve) or not accept (not approve) the final audit reports received from the auditors. This is not only a generally accepted best practice but also a compliance requirement because the audit reports and the auditing process will be considered incomplete unless the independent auditors receive formal approval notice from the governing body of the organization.
Which governing body of the organization is chosen to formally vote to accept the audit reports and how to oversee the financial statement audit process will vary based on the needs of the organization and the scale of the related tasks and responsibilities to be completed.
The Board of Directors could be the governing body responsible for overseeing and accepting the annual audit of the financial statements. However, these two responsibilities are usually split, with oversight of the audit process delegated to the finance committee or audit committee, and the Board retaining responsibility for final acceptance of the audit reports.
Planning Tip – Many nonprofit organizations that are new to having annual financial statement audits struggle with the question of whether they need to appoint an audit committee vs. delegating management of the audit process to an existing committee like the finance committee (which almost all organizations have). Larger organizations with additional complexities, risks, and challenges usually benefit from having a separate audit committee with the time and expanded expertise to help manage and ensure successful audits. For small to mid-size organizations preparing for their first financial statement audit, it is usually best to start by delegating management and oversight of the audit process to the finance committee. As time progresses and needs change, an audit committee could be added to meet evolving needs and expanded responsibilities.
In this case, it is best to notify the Board ahead of time that they need to be ready to accept and approve the audit of the financial statements. “Ready” means knowledgeable and confident to vote for approval, including having meetings with the auditors, reviewing the draft audit reports, and addressing any findings communicated by the auditors.
If the full Board delegated responsibility for overseeing the financial statement audit process (to the finance committee or audit committee (including meetings with the auditors and responding to auditor requests for information), the Board must hear that committee’s comments, observations, and recommendations prior to voting to accept (approve) or not accept (not approve) the audit reports.
