By Robert L. Brown, CPA
In their role as independent auditors, many CPAs work with the audit committees of commercial entities. When it comes to working with the audit committees of nonprofit entities, many of the practices and principles applicable to for-profits also apply, but certain areas require special attention. If you are called upon to help establish a nonprofit’s audit committee, there are many important factors you will need to weigh. Perhaps the most important elements that will ensure the effective operation of audit committees in a nonprofit are getting the right people to serve on the committee, setting the proper agenda, and establishing a sound relationship with the independent auditor.
Get the Right People
The most important aspect of establishing an effective audit committee is getting the right people to serve on it. While public companies are required by law to have "audit committee financial experts" on their audit committees, nonprofits don’t have that demand. While there may be CPAs on the board, there may not be enough to staff a three- or four-person audit committee. The committee should include "independent" board members, those who have no dealings with the organization other than their role as a board member or contributor. The people placed on the committee must be comfortable dealing with financial matters, the workings of balance sheets and statements of activities; be familiar with the work of auditors and their responsibilities; and, perhaps most importantly, be able to act and think independently of management. This last point is worth emphasizing. Nonprofits generally expect board members to be passionate advocates who support the organization in fund raising and in the community. There may be times when performing its function that the audit committee needs to take a hard line, whether that be regarding financial reporting, spending, or ethical matters. In those instances, the committee needs to act without hesitation. To do otherwise will place the organization’s reputation in the community at risk.
Set the Right Agenda
Good planning is critical to making an audit committee effective. Annually, the committee should compile an agenda for the full year that ensures it fulfills its fiduciary responsibilities. Important areas to address in this agenda include the following:
-- Review and approve the scope of the independent auditors’ annual audit plan and related fees.
-- Review management’s risk assessment of the organization.
-- Review any areas unique to the organization, such as executive remuneration and the procedures for handling gifts received with donor restrictions.
-- Review the organization’s plans for compliance with regulations.
-- Review the organization’s plan for identifying and resolving potential conflicts of interests.
-- Review the scope of the internal audit plan, if one exists.
-- Review the results of the annual audit with management and the independent auditors, including a report from the independent auditors regarding matters required to be communicated.
-- Review the organization’s tax returns prior to filing.
The items on the agenda should be accomplished in two or three meetings per year. At a minimum, there should be one meeting before the audit begins, to review the audit plan with the independent auditor; and one after the audit, to review the results. Other agenda items should be able to be covered at one of those meetings, depending on the timing of when they are available.
Establish a Sound Relationship with an Independent Auditor
The independent auditor, in many cases, has two important perspectives that directors do not have. First, he or she works with a finer level of detail than the directors. Second, he or she probably has several nonprofit clients, and perhaps has a practice unit dedicated to serving nonprofits. Audit committees want to establish a sound relationship with the auditor to take advantage of these perspectives. This requires establishing ground rules for communication and other expectations. The audit committee chair should be clear that the committee expects candid and forthright discussions of issues; not just financial reporting issues. Personnel matters, business best practices, or anything the auditor thinks is relevant to the committee should be communicated. The observations from the auditor can be invaluable in terms of confirming or challenging perceptions. To ensure honest dialogue, the committee needs to accept the auditors’ perspectives in confidence.
Robert L. Brown, CPA, is an assurance partner at PricewaterhouseCoopers LLP in Philadelphia. He serves on the boards of the Philadelphia Zoo and Lehigh University, and is chair of Leadership Philadelphia. He can be reached at robert.l.brown@us.pwc.com.
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