To Build, or Not to Build? The Importance of Creating an Effective Audit Committee

Today’s nonprofit and tax-exempt environment is continuously changing with updates to Forms 990, increased scrutiny of financial policies, possible changes to reporting standards, and charitable deduction debates – just to name a few.

However, in light of the pressures that are mounting in the sector, nonprofits are doing what they can to mitigate risks that could come out of these trying times. One way organizations are bracing themselves for change is by focusing more on their audit committees. While audit committees can appear as a mere formality dictated by reporting bodies, an effective committee can be of significant help to boards of directors.

The current climate has shifted the focal point for governing bodies from just overseeing operations to assessing strategies and risk management processes, understanding the complexity of operations, and being prepared to handle any crisis – big or small – that might arise. Both established and emerging organizations have a great need for independent oversight to ensure reliable financial reporting, reducing risk, and maintaining donor and public confidence. Below are the top three reasons why every nonprofit should consider forming an audit committee:

1. Compliance – While the IRS asks on the Form 990 whether the organization has an audit committee, it is noted as a best practice, not a requirement. However, many states do require an organization have a committee if the organization solicits charitable deductions. By not having an audit committee, current and potential funders may wonder why the organization is shying away from an IRS best practice.

2. Risk Management – Financial debacles and alleged fraudulent activities can easily go viral, and many have resulted in devastating financial losses to nonprofit organizations. With proper oversight, an audit committee can exercise vigilance and help foresee and mitigate possible risks that could be detrimental to an organization’s balance sheet as well as their reputation.

3. Public Perception – As donors look to “invest” in the greater good, many are looking for organizations that have sound operational and financial structures. Nonprofits that have solid governance structures and practices, including an audit committee, are often looked upon more favorably than those that do not.
Establishing and maintaining an effective audit committee takes time and requires proper planning and oversight from management and the board of directors. The best audit committee members are those that set the appropriate “tone at the top” by focusing on ensuring the organization acts in accordance with the best interests of its stakeholders. Fundamentally, this can only occur in environments where in-depth knowledge, integrity and an unbiased perspective pervade and are brought to bear at the board and audit committee, senior management and leadership levels. For more on selecting the best members for an effective audit committee, read Laurie Arena Rocha’s article, “Who Makes the Best Nonprofit Audit Committee Member?”

Whether an organization is just starting out or is more established, financial reporting and oversight best practices are instrumental to overall success. Building and maintaining an effective audit committee is just one of the many ways nonprofits can prepare to meet the challenges that lie ahead.

To learn more about establishing your committee, visit our microsite, “Effective Audit Committees for Nonprofit Organizations.” You can also watch an in-depth webinar and listen to a podcast on the subject by clicking here.