If your nonprofit organization undergoes an annual audit, chances are that you already have an audit committee.

If you don’t, a nonprofit audit committee is something you should consider – or may even be legally required to have.

Here’s what you need to know first…

What is a nonprofit audit committee?

Typically, the audit committee is an advisory committee to the board directors of your nonprofit. It is charged with the responsibility of finding, hiring, and interacting with the CPA firm that conducts your annual audit.

During the course of your audit, the auditors deal primarily with management (your executive director, finance director, development director, etc.) and your accounting staff.

However, if the auditors encounter any problems that cannot be resolved by management (e.g. difficulties or disagreements with management, discovery of fraud, etc.), the committee is the go-to group for the auditors.

At the audit’s conclusion, the auditors may be required to communicate the results directly to the committee.

When should the audit committee meet?

A nonprofit audit committee will commonly convene a few times per year. However, the California Nonprofit Integrity Act (CNIA) does not specify how often.

Consider the following approach for an organization needing an audit of its 12/31/2018 financial statements:

  • Meeting in Fall 2018 (prior to the audit)

The audit committee meets to plan for the upcoming audit. This meeting may include a recap of the prior audit results and a discussion on the status of any recommendations made by the auditor.

If you’re changing auditors, this meeting may be when the committee evaluates proposals from potential auditors and makes a selection.

  • Meeting in Spring 2019 (at the end of the audit process)

The committee meets with the auditor to review the results of the 2018 audit and discuss any recommendations made as a result of the current audit.

In some situations, an audit may yield extensive comments and recommendations that need to be considered for implementation. The audit committee will work with management to determine which recommendations you need to implement.

  • Meeting in Midsummer?

It may make sense for the audit committee to reconvene after a few months (say midsummer)  to take stock of the organization’s progress towards fulfilling the audit recommendations.

What specific regulations apply to audit committees?

Certain regulations relate to nonprofit audit committees. Specifically, they apply to nonprofits with annual revenues of at least $2 million.

You may recall that the CNIA is the same law that requires nonprofits to undergo an audit in the first place (those with annual revenues of at least $2 million).

As well as specifying which nonprofits are required to form an audit committee, the CNIA specifies its duties and who may (and may not) serve on the committee.

If you’re a California nonprofit below the $2 million threshold, you have considerable flexibility with how you set up and run your audit committee.

However, we recommend following the provisions of the CNIA because they are well thought out and reflect current best practices of the sector.

Interestingly, an audit committee may be comprised of just one individual. However, we believe that they are more effective with at least two or three individuals collaborating and brainstorming.

How do you form your audit committee?

The audit committee is formed under direction of the board of directors.

One underlying theme of the CNIA’s audit committee provisions is independence of the committee from management and the finance committee of the board.

Your audit committee may not include “staff members, the president or chief executive officer, the treasurer or chief financial officer of the organization.”

Members of your organization’s finance committee may serve on the audit committee but may not constitute 50 percent or more of the audit committee membership. The audit committee chair must not serve on your finance committee.

These provisions, relating to overlap between the finance committee and the audit committee, are important because they signify that lawmakers do not want nonprofits to claim compliance with the audit committee requirement merely by renaming the finance committee.

The audit is considered important enough to deserve its own advisory committee.

A sometimes-overlooked provision of the CNIA is that audit committee members can include members of the governing board as well as volunteers from the community who do not serve on the governing board.

So here’s a tip to consider: if you’re having a difficult time recruiting financial professionals to your board of directors because they do not want the time commitment of serving on a board year-round, see if you can persuade them to serve on your audit committee.

If you need further advice on forming your nonprofit audit committee, talk to us here.