Managing Your Financial Management: Tips and Guidance for Building Effective Audit Committees

On the heels of turmoil within the IRS, today’s nonprofit space faces numerous challenges, including ongoing updates regarding Form 990-T alterations, increased scrutiny over compliance and spirited disputes over charitable deductions, just to name a few. From a nonprofit’s perspective, successfully navigating these challenges calls for an effective, efficient audit committee that can provide proper financial management. Without it, tax and accounting issues can pose significant fiscal risks, mar an organization’s public perception, and mire its progress towards realizing its mission and goals.

In order for an audit committee to successfully mitigate these risks, however, considerable planning and oversight has to be applied to its organization and framework. Much of the process relies on recruiting partners with diverse areas of expertise who are finance-savvy, diligent, unbiased and ask difficult questions. Keep in mind: these people are the ones who will uphold the integrity of your organization.

For an audit committee to commit to sound financial management, it must first solidify its own management. After all, a committee can be comprised of highly qualified professionals, but it will be wholly ineffective without a sound leadership structure, governance policies and channels of communication. With that in mind, consider the following three dynamics that every committee should tackle in order to achieve its highest potential:

Composition: All committees vary in design and makeup, but as our own Laurie De Armond wrote last year, we generally suggest they feature a chair, a financial expert and two to five additional members. The chair’s role is difficult: he/she must be an effective communicator, knowledgeable of finances and a determined leader who can engage key stakeholders. Next, at least one member should be the go-to financial expert—his/her acumen increases operational confidence and acts as a safeguard against possible omissions. The remainder of the team should be comprised of members with diverse backgrounds and expertise who are financially shrewd and meticulous in their work. For further help with recruiting, check out the AICPA’s Candidate Decision Tree.

Governance: From the start, an audit committee should adopt a formal written charter that establishes its mission, delineates the breadth of its responsibilities and explains each member’s role(s). From the start, if your committee dedicates itself to transparency and effective communication, it will be more efficient and impactful once it gets down to work. For a useful road map to start with, check out our sample Audit Committee Charter provided in the Audit Guide’s Appendix (for illustrative purposes only).

Evaluation: There is always room for improvement, so conduct an annual assessment of your committee in order to reflect on and enhance its performance. We recommend that audit committee members complete a questionnaire such as the Audit Committee Self- Assessment (located in the Appendix). Committee members may also consider evaluating one other directly and asking for feedback from management and internal/external auditors. As with all business, honest feedback can uncover necessary changes and challenge members to meet strategic needs.

For our most thorough considerations on audit committee best practices, visit our full Audit Committee Guide, and stay tuned to the blog for the most up-to-date analysis and insights into the world of nonprofits.