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What You Should Know about Audit Committees
By Rosalie Miller, CPA
Does your organization have an audit committee? Does it need one? When the Sarbanes-Oxley Act was signed on July 30, 2002, significant changes to financial practices and governance regulations were introduced. Although not directly applicable to the nonprofit sector, some common sense applications can be adopted by nonprofits. One such regulation relates to establishing an audit committee, a process for electing audit committee members, and a method for maintaining adequate reporting procedures.
While many nonprofit organizations already have a finance committee in place, it is important to remember than an audit committee has different responsibilities. While the finance committee reviews investment policies and monitors the funds of the organization on a regular basis, the audit committee provides independent oversight into the organization’s accounting and financial reporting and oversees the organization’s annual audits. The audit committee may oversee a broad range of areas including:
- Governance
- Ethics
- Adequacy of internal controls
- Compensatory reviews of executive level staff
- Accuracy of records and reports presented to the board of directors
- Proper authorization of activities and expenditures
- Review of the tax-exempt status and identification of activities that could jeopardize this status
- Protection of employees raising concerns about serious accounting or auditing irregularities
The Board of Directors appoints the audit committee and has authority to remove members at any time. The committee should consist of at least three members of the board of directors and one financial expert. At least on member of the committee should be able to understand and analyze the financial statements of the organization and the overall competency level of the auditing firm.
The committee should meet at least four times annually and as many additional times as the committee deems necessary. The committee is required to have at least one meeting annually with the outside auditing firm. The audit committee should ensure that the auditing firm has the skills and experience to carry out the auditing function for the organization, and that its performance is carefully reviewed. The audit committee should meet with the auditor, review the annual audit, and recommend its approval or modification to the full board.
Although not required to adopt these regulations, you may want to consider if it makes sense for your nonprofit organization to form an audit committee and implement the above guidelines. Please contact us at PMN if you would like additional guidance on forming an audit committee, or advice on the responsibilities of an audit committee.
If you would like to discuss this subject further, please contact Rosalie Miller (rmiller@pmn.com) or any member of our not-for-profit committee at (617) 426‑9440.
Note: This article represents a general overview of or opinion on certain tax issues or developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation. We recommend you consult your professional tax advisor before taking any action based on anything in this article.
IRS CIRCULAR 230 NOTICE: In compliance with U.S. Treasury Circular 230 Regulations and any applicable state laws, we hereby notify you that any tax advice contained in the body of this document, or attachments thereto, was not intended or written to be used, and cannot be used, by the recipient or any other party for the purpose of (1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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