What your board doesn’t know about nonprofit audits could hurt you.

How to make sure your board knows what they’re legally obligated to do in an audit.

If a nonprofit’s board members weren’t informed of the totality of their roles when they agreed to serve, it’s very possible that they don’t understand one fundamental truth.

Every nonprofit board member has fiduciary responsibilities and obligations. These duties begin as soon as a board member has been seated.

The board is responsible for oversight of the nonprofit’s accounting functions and evaluating the performance of any independent auditors. Some nonprofits choose to create an Audit committee to oversee the audit, while others may include that responsibility in the board’s finance committee. Either way, the ultimate responsibility lies with the board.

What is an Audit committee and what does it do?

An Audit committee is simply an ad hoc or permanent committee that has been given responsibility and authority by the Board of directors to make final recommendations to the board for final approval. The Committee must include board members. If it’s appropriate, it can also include vetted members from outside the organization. Essentially, the Audit committee is accountable for the audit, which includes:

• Overseeing the entire process — hiring, evaluating and, if necessary, terminating the independent auditor.

• Having direct and often confidential discussions with the auditor to talk about whether or not there is any suspicion of fraud by nonprofit staff or agents, suppliers, or vendors.
• Presenting the audit reports and, if applicable, sharing findings with the full Board of directors.
• Ensuring that the board understand recommendations made by the auditors.
• Offering understanding and support for recommended changes in practice, reporting or processes to maintain or bring the nonprofit into line with acceptable accounting practices.
• Receiving complaints about financial management and being responsible for investigating issues to ensure there is no retaliation against anyone for coming forward (this is a designated board duty in some nonprofits).

An Audit committee is not mandatory. Nonprofits may also use the executive committee to provide oversight for the independent audit process. Some boards assign oversight to the full board but having a smaller group focus on the audit process often proves to be far more practical.

The audit committee has responsibilities beyond the annual audit process. The committee needs to be aware of the overall financial health of the nonprofit. Members should understand all recommendations contained in audit reports and should work with management and the full Board of directors throughout the year to improve or alter any financial practices or policies that are questioned and implement recommended changes outlined in the auditor’s report.

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What happens when it’s time for the Audit committee to review the audit?

The audit report should be presented formally by the independent auditor, in person, either on-site or virtually. Before this happens, the audit committee and the nonprofit’s management should review a draft of the audit report and resolve any issues before the presentation to the full Board of directors. For example:

Process

• Did the auditors note any limitations to the scope or the nature of the process?
• Were there serious disputes or problems during the audit?
• Did any significant changes occur to the audit plan?
• Were the organization’s internal financial controls adequate?
• Did any conflicts of interest arise between auditors and staff, and how were they handled?

• Are there legal or regulatory matters that will impact on the organization’s financial statements?

Results and Issues

• Did the auditor note any material or serious issues or recommendations? If so, make sure the auditor provides details.
• Did the management team follow suggestions from auditors in prior years to correct noted weaknesses in the accounting system?
• Are there any items that might be disputed by the Internal Revenue Service (reported in IRS form 990)? If so, what documentation should be available to support the item?

• Did the auditors discover anything regarding financial statements or internal financial management procedures that should be explained to the board?

Organizational questions and recommendations

• How do the organization’s accounting policies and procedures compare with other comparable nonprofits?
• Do the auditors have any suggestions for improvements in accounting, reporting, or operating procedures?

• Are there any new initiatives the organization wants to enact that the auditor agrees could help strengthen the accounting process? If so, the auditor can choose to include that in the management letter.

What the audit committee should discuss with the auditor.

When the committee reviews the management letter and the audit report they need to ensure that they understand what the auditors discovered: Was the staff cooperative? Were there any conflicts? Were the organization’s internal financial controls adequate? And, of course, what changes do the auditors recommend?

What the audit committee should discuss with the Executive Director.

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The committee should assess issues such as if the Executive Director was satisfied with everything about the audit process; if there were documents the staff couldn’t locate; if there were difficulties that arose during the audit; and if the Executive Director and the management team is satisfied with the results and recommended changes or improvements.

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Presenting the audit to the full Board of directors.

All board members should receive a copy of the audit along with a letter to management. Board members don’t approve an audit report, they are charged with “accepting” it as is or rejecting it because the findings of the report aren’t subject to change or editing at the board’s request.  

A full discussion by the entire board should be encouraged so that all board members are familiar with the contents and findings of the audit report.

To learn more, talk with Veracity Pros

From choosing the right independent auditor to preparing for an audit to understanding the results, we can help you make the right decisions for your nonprofit.

If you have questions about nonprofit audits or any other financial issues, please contact us at hello@veracitypros.com

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