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To Audit Committee or Not to Audit Committee, That Is the Question(Along with "How?")


You've agreed to serve on a charity's board. You arrive at your first meeting ready to learn how to promote the organization's mission, pitch in with fundraising, and help recruit volunteers, only to find that what the board really needs to do is set up an audit committee. Great—the closest you've ever been to an auditor was when you passed the IRS building during a trip to Washington, D.C. And your fellow board members don't know much more about auditing than you do. What's a board member to do?

For one thing, relax. Help is available.

Why an Audit Committee in the First Place?

A nonprofit's board is responsible for ensuring that the organization's finances are, in the words of the Final Report of the Panel on the Nonprofit Sector, "conducted legally, ethically, and in accordance with proper accounting rules." Unfortunately, as our hypothetical example shows, willingness to serve on a board doesn't necessarily translate into the expertise needed to fill this particular role.

Having the nonprofit's finances independently audited doesn't get a board off the hook, either. Technically, the board oversees the external auditor's activities, and it is the board that accepts the audit. If the audit misses something, the board can be held responsible. An audit committee can assist the board with the auditing process, from selecting the auditor to accept the results of the audit.

Does Your Organization Need an Audit Committee?

If your finances are independently audited, you should at least think about having one. The Final Report recommends that "every charitable organization that has its financial statement independently audited, whether legally required or not, ... consider establishing a separate audit committee of the board. If the board does not have sufficient financial literacy, and if state law permits, it may form an audit committee comprised of non-voting, non-staff advisors rather than board members."

FYI: You can find out if your state requires your organization to undergo a financial audit by going to the Unified Registration Statement Web site. Scroll to the middle of the page and link to a summary of your state's requirements. Ultimately, you should confirm what you find with the appropriate state agency. You can find contact information and Web site URLs in the summaries at multistatefiling.org or on the NASCOnet Web site.

OK, We Need an Audit Committee—Now What?

The following resources can help you and your fellow board members through the processes of establishing and working with an audit committee:

  • AICPA Audit Committee Toolkit: Not-for-Profit Organizations–tools from A ("Audit Committee Charter Matrix," a table of audit committee goals and steps to accomplish them) to  U ("Unique Transactions and Financial Relationships," discussion of transactions and arrangements that can increase a nonprofit's financial risk)
  • "Audit Committees," Final Report of the Panel on the Nonprofit Sector, pp. 79-80—information on boards and the audit process
  • "Financial Accountability and Audit Committees," National Council of Nonprofit Associations—information ranging from the purpose of an audit committee and who should serve on it to a sample document of audit committee roles and responsibilities
  • "Governance: Audit Committees," Nonprofit Coordinating Committee of New York—overview of audit committee responsibilities
  • Colette Kamps, "Do Nonprofits Really Need an Audit Committee?" Association of Fundraising Professionals—background on audit committees and their responsibilities
Suzanne E. Coffman, September 2005
© 2005, Philanthropic Research, Inc. (GuideStar)

Suzanne Coffman is GuideStar's director of communications and editor of the Newsletter.
Topics: Finance