Why Not-for-Profits Need Both Audit and Finance Committees

Why Not-for-Profits Need Both Audit and Finance Committees

Dec 20, 2019

Pennsylvania CPA Journal

When building a volunteer organization, optimizing volunteer resources and capitalizing on employee time are primary challenges. The common solution is to institute overarching committees of finance, nominating, programming, and fund-raising. Due to this committee consolidation, audit and financial reporting responsibilities are often added into the finance committee. Even with the growth of an organization, these two functions never leave that one committee – even though they should.

Understanding the critical distinction between a finance and audit committee is a natural part of the maturation process for any not-for-profit organization. Not-for-profits are always looking for ways to economize, and they often believe that one committee for both financial and audit oversight will save management time and volunteer resources. At first this may seem true, but the benefits of separate and distinct audit and finance committees are too important to ignore.

Generally, the finance committee is charged with the financial practices of the organization, while the audit committee oversees the process in which these practices are carried out. An example would be the finance committee’s responsibility for the preparation of the organization’s budget and financial statements; whereas the audit committee ensures that those financial statements are looked over and disseminated appropriately. They seek and share the findings of the organization’s independent auditors.

Here is the standard division of responsibilities for both.

Audit Committee

  • Examines the organization’s financial statements and other official financial information provided to the public.
  • Ensures that reports are received, monitored, and distributed correctly.
  • Oversees the organization’s internal controls, including management’s compliance with applicable policies, procedures, and risk management. (For example, an organization that is part of a national network might annually review whether it meets rechartering requirements.)
  • Usually oversees the annual independent audit process, including engaging the independent auditor and receiving all reports and management letters from the auditor.
  • Views the annual information returns (IRS Form 1099) and tax returns (IRS Form 990 and related schedules and forms), and recommends them for approval, signature, and submission by the appropriate officer. It also transmits the returns to the board for oversight before signing and submitting it.
  • Examines the organization’s procedures for reporting problems. (For example, the whistle-blower policy and process, anti-fraud policies, and policy and procedures related to the discovery of errors or illegal acts.)

 Finance Committee

  • Oversees the preparation of the annual budget and financial statements. It ensures that budgets and interim financial statements are prepared.
  • Oversees the administration, collection, and disbursement of the organization’s financial resources.
  • Advises the board with respect to making significant financial decisions, such as correcting or restructuring the organization’s books and accounting procedures when fiscal problems arise.
  • Oversees the preparation and implementation of the governance policies referenced in the Form 990: conflict of interest, document retention, whistle-blower, look-over of executive compensation, etc.
  • Ensures that joint membership between the audit committee and the finance committee meets local laws and regulations (if an organization has both committees).

Although finding appropriate members to sit on each of these committees and who share a passion for the client’s mission can be difficult, placing these volunteers on a single committee to oversee both the finance and audit committee charges is not the answer. The heavy workload of a combined audit/finance committee volunteer makes the service unappealing to many potential members. Separating the two responsibilities into different groups reduces the burden and increases the number of volunteers who will remain dedicated to the organization’s mission through committee placement.

While separating the financial and audit committees may not be an easy option for all not-for-profit organizations, there are substantial governance and oversight benefits that pay tremendous dividends over time.

Laurie Horvath, CPA, is a partner with Baker Tilly Virchow Krause LLP in Detroit. She can be reached at laurie.horvath@bakertilly.com.
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