BDO’s Institute for Nonprofit Excellence Discusses Best Governance Practices

BDO’s Institute held a meeting on October 18 in Washington D.C. to review many of the best practices related to governance that are outlined in our guide entitled “Effective Audit Committees for Nonprofit Organizations.”  We presented before an audience of about 40 people who were interested in gleaning more information to assist their respective organizations with governance issues.

The short take away from the meeting, as well as the guide, is yes, your organization needs an audit committee.  We stressed that although there is no legal requirement to have an audit committee, it is definitely in the best interest of the organization.  The Board is not the best body to fulfill the responsibilities of an audit committee since its members are busy with overall strategic goals. Putting this detailed responsibility on their list may not allow them to adequately address all issues, and may actually hinder the organization’s ability to attract future Board members.

One major responsibility of an audit committee is to ensure that the proper tone at the top is set, as this is one of the most powerful internal controls.  A proper tone at the top makes it clear that all unethical and illegal behaviors by management, employees, and volunteers are absolutely unacceptable.  Audit committee members should be skeptical and take the stance of “trust, but verify.” Other key takeaways from this month’s meeting include:

Finance and Audit Committee Overlap

One question raised by an attendee at the meeting was: if an organization has a finance committee, could it also function as the audit committee?  We noted that this is an acceptable strategy.  If an organization has separate committees, they should each maintain well-documented minutes of their respective meetings.  The role of a finance committee is to focus on examining the numbers and whether internal controls are adequate.  The role of an audit committee is to look at the processes and how finances, risks, communication, and the audit process are being managed.  There is overlap in these functions but, especially for a larger organization, it is better to have two separate committees to ensure that all risks are being addressed.  We further cautioned that some states (as the state of California does) may require that these committees be separate.  This requirement established by the state of California affects all organizations that perform charitable solicitations in California regardless of where the organization is domiciled.

Membership Overlap

The issue of committee overlap raised audience questions regarding whether an organization with discrete finance and audit committees should allow members to overlap? If given the choice, we believe that some overlap may be good, but there is no requirement. Ultimately, this should be decided based on the preference of the organization.

Nonfinancial Risk

One component of an audit committee’s mission that is often overlooked is the nonfinancial risks faced by an organization.  These are risks that are nonfinancial on the surface, but can result in financial risk.  An example of this is a situation where a medical procedure in a healthcare entity results in serious complications for a patient.  The lawsuit that ensues becomes the financial risk.

It is important to note that the audit committee is not expected to oversee these nonfinancial processes; in the example given this would be the medical protocols. However, audit committee members should be asking management whether the necessary processes are in place to mitigate these types of risk.

One meeting attendee questioned whether the audit committee has responsibility for the breakdown in nonfinancial areas.  We responded that this is not the case.  The audit committee’s responsibility is to ensure that the organization has considered these risks and has a process in-place.  However, if there is a breakdown, the audit committee should be asking what went wrong and what steps the organization is taking to fix the process and minimize the risk that it will happen again.

There are many other best practices related to establishing and maintaining audit committees outlined in the online, interactive guide that can be accessed at the following link:

Keep visiting our Nonprofit Standard blog for more posts regarding the process of establishing an audit committee and evaluating an audit committee’s effectiveness.  In addition, the Institute will be hosting a webinar version of this live Institute meeting in January. To stay up to date on our seminars and events, visit our Industry Events page.