While nonprofits have a wide range of objectives, their general charter is to accumulate and distribute funds to address specific social objectives and to improve society in some notable way. Government approval is required to be designated a nonprofit and thereby enjoy tax benefits that profit-seeking organizations do not. In return, the nonprofit must abide by regulations that disallow the use assets for non-related purposes. To that end, nonprofit responsibilities include the creation of a board of governance to oversee and maintain compliance.
Audit Committee Responsibilities
Though nonprofit organizations do not have the same responsibility to shareholders as profit-driven corporations, these certainly have an obligation to maintain accurate and detailed financial reporting. Supported by funds from donors and foundations, plus the government from a tax-exempt perspective, accounting and audit procedures must comply with the organization’s charter and applicable tax laws.
An Audit Committee is commissioned by the Board of Directors of the nonprofit to monitor, review and oversee the nonprofit responsibilities to create and maintain accurate accounting and audit processes. The charter of responsibilities should be clear to all, so that the Committee may execute their duties without interference. At least one member of the Committee should be well-versed in accounting principles or, alternatively, a consultant should be budgeted for and hired to ensure that accounting procedures and fund disbursement are managed properly. And systematic check and balance processes should be created to eliminate improper or fraudulent handling of the nonprofit’s assets.
Effective Nonprofit Audit Committees fulfill nonprofit responsibilities by:
- continually improving the financial system with well-defined procedures and reporting.
- creating deterrents to mismanagement and fraud .
- establishing effective audit processes, both internal and external.
Securing an Auditor
The Audit Committee is responsible for hiring an auditor to summarize the financial process. Charged with the oversight responsibility, the Audit Committee must make available all records for the auditor to perform effectively. Ongoing communication with the auditor is important to ensure that apparent obstacles that may be hindering the audit process are removed.
Reviewing the Audit Report
When the audit is completed and the report submitted, the Audit Committee will meet with the auditor to review the findings and ensure the nonprofit responsibilities are being met. Ideally everything is in order. But if irregularities and variances should exist, these will be brought to light for discussion of futher investigation and resolution. Some discrepancies may require changes in procedure and stronger check and balance. Serious problems might result in employee dismissal, legal prosecution and a substantial revamping of the bookkeeping procedures.
Presenting to the Board of Directors
The Audit Committee will assemble a summary with specific conclusions and recommendations for presentation to the Board of Directors. During this presentation, the Audit Committee will:
- Provide a summary of the audit.
- Summarize the current financial situation.
- Review variations or discrepancies discovered.
- Recommend solutions for resolving any mishandling issues.
- Make recommendations to strengthen overall financial management.
- Provide an assessment of the auditor and the audit process.
With Board approval, the Audit Committee will proceed to immediately resolve mismanagement issues.
Importance of the Audit Committee Function
Effective Audit Committees are vital to the life the organization and meeting nonprofit responsibilities. Poor oversight may compromise the integrity of the organization and eventually jeopardize the future of the endeavor.
Contact Ernst Wintter & Associates LLP today to see how we can help you through the process of a nonprofit audit.