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Monday, December 17, 2018

Nonprofit Audit Committees: Roles & Responsibilities


In nonprofit organizations that undergo an annual independent audit, boards often find that delegating oversight of the audit process to a smaller committee makes a lot of sense. While the entire board of directors has ultimate responsibility for the audit, a small committee (or even a task force that convenes just before the audit and disbands after) is typically more nimble, efficient and effective.

One advantage of a separate audit committee is its independence. The committee should comprise directors who are independent of the management of the organization. In some cases, nonprofit boards invite volunteers or others who are not board members. The committee’s independence allows it to be objective when assessing the organization’s financial procedures and staff members, as well as the performance of the auditors.

Note that, while your CFO and executive director cannot serve on the audit committee, they will be expected to attend audit committee meetings when requested.

Roles & Responsibilities

The audit committee’s main role is to safeguard the organization’s financial integrity. Therefore, it is responsible for:

  • Reviewing the organization’s financial statements and other financial data, which are typically prepared by the finance committee. (For more on the delineation of duties between the audit and finance committees, check out this chart.)
  • Overseeing the annual audit process, including hiring and communicating with the organization’s external auditors.
  • Assessing internal controls over financial reporting, especially controls that surround high-risk areas such as donations, travel and entertainment, professional fees and executive compensation. This assessment should include verification that internal control systems are appropriately documented.
  • Reviewing annual information returns, such as Form 990.
  • Overseeing compliance with all applicable laws and regulations and the organization’s code of conduct.

The audit committee should meet as often as necessary to fulfill these duties. At a minimum, it should convene twice a year — once before the annual audit to discuss pre-audit plans, and once after the audit to discuss the audited financial statements and comments from the external auditors. Ideally, the committee will meet at least three times a year.

Read our nonprofit audit committee checklist for more best practices, or give Armanino’s nonprofit accounting advisors a call to discuss how to start an audit committee or strengthen an existing one.


California’s Audit Committee Requirements Under the Nonprofit Integrity Act

In the wake of financial scandals involving large nonprofits as well as corporations, California enacted the Nonprofit Integrity Act of 2004. Among its many provisions is an audit committee requirement for charities with gross revenues of $2 million or more that file reports with the California attorney general. Schools, hospitals and religious organizations are generally excluded.

In an effort to ensure the audit committee’s independence, the act requires the following:

  • The committee cannot include any member of the staff, not even top management.
  • The committee cannot include anyone with a material financial interest in any entity doing business with the charitable organization.
  • The board of directors must appoint the audit committee, and the committee can include non-board members.
  • No more than 50 percent of the audit committee can be members of the finance committee, and the chair of the audit committee cannot be a finance committee member.

Different states have different requirements for independent audits and audit committees in nonprofit organizations. You can find a list of each state’s nonprofit audit requirements here.

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