Not-for-profit organizations: Why you need an audit and finance committee

When building a volunteer organization, optimizing volunteer resources and capitalizing on employee time are frequently the primary challenges. The common solution is to institute overarching committees of finance, nominating, programming and fundraising. However, due to this committee consolidation, audit and financial reporting responsibilities are added into the finance committee and often, despite the growth of an organization, never leave that committee – even though they should.

Understanding the critical distinction between a finance and audit committee is a natural part of the maturation process for any not-for-profit organization. Not-for-profits are always looking for ways to economize and often believe that one committee (to handle both the financial and audit oversight) will save management time and volunteer resources. While at first this may seem true, the benefits to any organization of separate and distinct audit and finance committees are too important to ignore. Diving deeper into the governance responsibilities of each committee quickly reveals the reasons why the two committee structure is important, even in smaller organizations.

At a high level, the finance committee is charged with financial practices of the organization, while the audit committee oversees the process in which these practices are carried out. An example of this distinction is that the finance committee is charged with the preparation of the organization’s budget and financial statements; whereas, the audit committee is responsible for ensuring that the financial statements are reviewed and disseminated appropriately. They seek and share the findings of the organization’s independent auditors.

The standard division of responsibilities

Audit committee

• Reviews the organization’s financial statements and other official financial information provided to the public
• Ensures that reports are received, monitored, and distributed correctly
• Oversees the organization’s internal controls, including management’s compliance with applicable policies and procedures and risk management (for example, for organizations that are part of a national network, annually reviewing whether the organization meets the re-chartering requirements of its national organization)
• Usually oversees the annual independent audit process, including engaging the independent auditor and receiving all reports and management letters from the auditor
• Reviews the annual information returns (IRS Form 990, related schedules, and forms) and recommends it for approval, signature, and submission by the appropriate officer; the audit committee also transmits the returns to the board for its review before signing and submitting it; the audit committee engages (on the board’s behalf) and interacts with the independent auditor or auditing firm; many audit firms also prepare the federal and state tax returns for their not-for-profit audit clients
• Reviews the organization’s procedures for reporting problems; the audit committee may exercise primary responsibility to review the whistle-blower policy and process, anti-fraud policies, and policy and procedures related to the discovery of errors or illegal acts, whistle-blower hotline, and other communication methods and determine the process for “special investigations” (whistle-blower allegations, anti-fraud compliance, discovery of errors or illegal acts)
• The board may delegate other authority and/or duties to the audit committee

Finance committee

• Oversees the preparation of the annual budget and financial statements; the finance committee ensures that budgets and interim financial statements are prepared
• Oversees the administration, collection, and disbursement of the organization’s financial resources, in addition to the related policies and procedures
• Advises the board with respect to making significant financial decisions, such as correcting or restructuring the organization's books and accounting procedures when fiscal problems arise
• Oversees the preparation and implementation of the governance policies referenced in the Form 990: conflict of interest, document retention, whistle-blower, review of executive compensation, etc.
• Should ensure that joint membership between the audit committee and the finance committee meets local laws and regulations (if an organization has both committees)

Although finding educated members to both sit on each of these committees and share a passion for the client’s mission can be difficult, not-for-profit leaders believe that it is easier to establish a single committee to oversee both the finance and audit committee charges.  However, a common complaint of other not-for-profit leaders is that the heavy workload of an audit/finance committee volunteer member makes it unappealing to many potential members. Separating the two committees into different volunteer responsibilities reduces the volunteer’s burden and increases the number of volunteers who remain dedicated to the organization’s mission through committee placement.

While separating the financial and audit committees may not be an easy or practical option for all not-for-profit organizations, there are substantial governance and oversight benefits that pay tremendous dividends over time.

For more information on this topic, or to learn how Baker Tilly not-for-profit team specialists can help, contact our team.

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