Should a Not-For-Profit Form an Audit Committee?
by Andrew Lotts, member, CJBS With the Sarbanes-Oxley Act (SOX) of 2002, there has been limited direct impact on nonprofits, remembering that SOX is law for publicly traded companies only. However, many forward-thinking not-for-profits are asking themselves what parts of the SOX they should consider enacting as a part of best-practices. In fact, the Attorney Generals of several states have already implemented some Sarbanes-like reforms. Others are still in the study stage. A recent trend among nonprofits is to adopt an audit committee structure. There are some pros and cons to this: If implemented correctly, an audit committee should provide the Board with a clear, independent voice to address financial matters. It also establishes that the auditors are neither engaged by nor report to management, but rather, the Board, through its audit committee. On the down-side, the committee members will need to devote the time and develop the expertise to effectively monitor increasingly complex financial practices. Some of the duties of an audit committee are as follows:
- Engage the auditing firm
- Review the audit with the auditor
- Present the audit to the Board
- Provide an outlet for confidential reporting of any impropriety suspected by an employee with fear of management’s retribution (whistleblowers)
- Review the appropriateness of major accounting and internal control policies
- Protection of assets
- Should have at least one member of the Board (preferably more than one)
- Should have a least one “expert” in the field on non-profit accounting/auditing (you may consider engaging such an individual if none are available from your volunteer base)
- Should meet several times a year
- Staff members normally do not serve on the committee
- Boards with high turnover may consider longer terms to retain institutional memory
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