Who Can Serve as a Financial Expert on the Audit Committee?

The inclusion of at least one audit committee member with financial expertise is a highly recommended best practice. This guidance was mandated for public companies by the Sarbanes-Oxley Act and should be a consideration for all organizations to adopt. As noted previously, the Federal Form 990 asks organizations whether they have a committee that takes responsibility for the audit and for the selection of the independent auditors. Having a member with financial expertise on your audit committee will help the organization ensure it has fulfilled all necessary requirements.

An issue sometimes encountered by nonprofit organizations is the ability to find members who possess the attributes for financial expertise. There are several resources available to find potential audit committee members with the necessary expertise. The AICPA has an Audit Committee Effectiveness Center’s Audit Committee Matching System. The National Association of Corporate Directors (NACD) also has a Directors Registry1 that can be utilized. Many state CPA societies have these resources as well. Some nonprofit organizations establish a relationship with a peer or otherwise comparable organization and have the CFOs provide the financial expertise to the other organization. For a list of other resources available to an organization to assist in attaining the financial expertise it would like should refer to “The AICPA Audit Committee Toolkit: Not-for-Profit Organizations, 2nd Edition.”

The following are attributes that are deemed to be essential components of financial expertise:

  • An understanding of generally accepted accounting principles (GAAP) and nonprofit financial statements
  • The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves
  • Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the nonprofit organization’s financial statements, or experience actively supervising one or more persons engaged in such activities;
  • An understanding of internal controls and procedures for financial reporting
  • An understanding of the audit committee function
  • A general understanding of nonprofit financial issues and specific knowledge of the nonprofit industry (e.g., health care, education) in which the organization operates

The following points should be considered to assess whether an individual audit committee member or the committee as a whole, possesses the attributes discussed above:

  • Does state law include certain requirements of audit committees regarding independence, expertise, membership and shared responsibilities with the finance committee?
  • Education and experience as a chief or principal financial officer, principal accounting officer, controller, public accountant or auditor, or experience in one or more positions that involve the performance of similar functions
  • Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions
  • Experience overseeing or assessing the performance of nonprofit organizations or public accountants with respect to the preparation, auditing or evaluation of financial statements
  • Other relevant experience such as service on other boards or audit committees

The responsibility to determine whether a person qualifies to be treated as an audit committee financial expert, based on the criteria discussed previously, rests with the board of directors.

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(1) Refer to the NACD’s Directors Registry accessible via: http://www.nacdonline.org/