An effective audit committee can be your not-for-profit organization’s best friend, safeguarding its most valuable asset: its reputation. Audit committees are tasked with providing experience, oversight and direction. Well-run committees ensure that management implements and follows an effective system of internal controls, and that outside auditors objectively assess the organization’s financial reporting practices. Through these and related efforts, audit committees strengthen their organizations by protecting their integrity, financial health and long-term viability.
1. MHMMessenger TM Mayer Hoffman McCann P.C. An Independent CPA
Firm A publication of the Professional Standards Group An effective
audit committee can be your not-for-profit organizations best
friend, safeguarding its most valuable asset: its reputation. Audit
committees are tasked with providing experience, oversight and
direction. Well-run committees ensure that management implements
and follows an effective system of internal controls, and that
outside auditors objectively assess the organizations financial
reporting practices. Through these and related efforts, audit
committees strengthen their organizations by protecting their
integrity, financial health and long-term our roots run deepTM be
independent of the organizations management meaning participants
receive no financial incentives or payment from management. The
audit committee itself also should be independent. Though it works
collaboratively with internal and external auditors and management,
the committee must be completely separate from each of these
groups. While audit committees may include members with varied
backgrounds and experience in key business functions, for example
financial reporting or risk management, organizations generally
look for members who possess a solid background in business or
finance, have a strong understanding of internal control concepts,
and knowledge of business risk and compliance issues unique to the
not-for-profit organization. At least one member of the audit
committee should have deep financial expertise, including knowledge
of financial reporting and internal controls, experience with the
audit process and working with auditors, and familiarity with
not-for-profit accounting policies and procedures. Additionally,
while most audit committee members typically have finance,
accounting or legal backgrounds, it is oftentimes useful to also
include a member with specific program expertise. Of course, to be
effective all committee members must understand the organizations
business model, and the drivers impacting managements choices in
key areas such as the selection and application of critical
accounting policies and financial strategies. 2014 Mayer Hoffman
McCann P.C. 877-887-1090 www.mhmcpa.com All rights reserved.
viability. As not-for-profits face increased scrutiny from the IRS;
local, state and federal government; and from donors the pressure
on todays audit committees is extraordinary. Each member
understands it is his or her responsibility not only to prepare
accurate financial statements, demonstrate responsible financial
management, maintain regulatory compliance and manage operating
risks, but to protect the very essence of the organization.
Committee Composition Audit committees vary in size based on an
organizations complexity but typically are comprised of three to
five members, the majority of whom should be board members. All
audit committee members should September 2014 Best Practices of
Effective Audit Committees
2. MHMMessenger 2014 Mayer Hoffman McCann P.C. 877-887-1090
www.mhmcpa.com All rights reserved. 2 Primary Audit Committee
Responsibilities Though audit committees have numerous
responsibilities, three stand apart: representing the board in
overseeing the establishment and implementation of accounting
policies and internal controls aimed at promoting positive
financial stewardship; initiating the conversation on business
risks; and overseeing compliance. Financial stewardship Audit
committees are charged with protecting the organizations assets,
mitigating fraud risk, and ensuring the accuracy of financial
reporting. To do so, effective audit committees closely monitor the
findings of the internal and external auditors charged with testing
the organizations internal controls and risk management procedures.
Audit committee members should meet regularly with internal
auditors and at least twice a year with external auditors to
discuss work plans and review audit findings prior to presentation
to the full board of directors. Business risk Audit committees lead
the discussion on business risk, exploring how the organization
plans for known and potential risks. To do so, audit committee
members must thoroughly understand the organizations investment
practices, disaster recovery plans, donor and grantor requirements,
charitable registration practices, insurance coverage, adherence to
tax regulations and most significant, the not-for-profits risk
tolerance. For greatest effectiveness, the audit committee should
work closely with other board committees that may have a hand in
addressing business risk, for instance the investment, development
and/or human resources committees. Compliance To be effective and
truly help its organization, an audit committee must be keenly
aware of compliance issues. Committee members must understand not
only the regulatory standards that affect the organization, but how
the organization conforms to those standards and how internal and
external auditors assess the performance of the organization
regarding these regulatory matters. While the size and type of
organization will influence the audit committees specific duties,
every audit committee will have a role in helping its organization
comply with rules regarding financial accounting, reporting,
billing, spending, investing, and program reporting. Executive
Sessions Executive sessions offer audit committee members the
opportunity to query members of the management team and external
auditors on various risk management-related subjects. These
sessions are intended to allow for a free exchange of ideas on
sensitive subjects in a non-threatening environment. In fact, the
sessions are specifically designed to provide participants the
opportunity to offer candid views on sensitive issues that may be
inappropriate to discuss in an open forum. Thats why it is
important to consider the participants, and perhaps conduct
meetings between individuals or groups. For example, if an audit
committee member wants to discuss an issue with the audit firm of a
large not-for-profit, the CFO and members of management should not
be present so that the audit firm and members of the audit
committee feel at ease and are willing to be open in their
discussion.
3. MHMMessenger Posing questions The audit committee should
take into consideration the organizations mission, the competitive
environment in which it operates, the current economic climate, and
similar factors when crafting questions to pose during an executive
session. It is important that questions foster an open dialogue
between committee members and members of the audit team. It is
imperative that committee members possess sufficient financial
expertise to understand the issues and formulate appropriate
follow-up questions, as well as take any further action, as needed.
While the list of potential questions is endless, here are a few
examples of the types of questions typically posed by audit
committee members in executive sessions: Are you aware of any
situations of revenue or expense manipulation? Is the organization
taking a critical look at its business model? Or, is it just
looking for short-term solutions that may not be sustainable? Are
resources (people, assets, cash flow, etc.) sufficient to meet the
mission of the organization? Is risk management part of the
organizations culture? Are other organizations looking at their
risks in a holistic way, including operational and financial risks
that range from possible to unimaginable? Enhancing Effectiveness
The most effective audit committees routinely perform
self-assessments to evaluate whether their individual members, as
well as the group as a whole, possess the knowledge necessary to
respond to the business, reporting, technical or other key issues
facing the not-for- profit organization. For More Information Audit
committees play a pivotal role in steering todays organizations,
and a committees diligence and effectiveness can greatly enhance or
detract from a not-for-profits success. For guidance on
establishing a new audit committee, or assistance enhancing the
performance of one that already exists, please contact Michelle
Spriggs of MHMs Professional Standards Group or your MHM service
professional. You can reach Michelle at [email protected] or
774.206.8336. The information in this MHM Messenger is a brief
summary and may not include all the details relevant to your
situation. 2014 Mayer Hoffman McCann P.C. 877-887-1090
www.mhmcpa.com All rights reserved. 3 Please contact your MHM
auditor to further discuss the impact on your audit or audit
report.