Audit and Finance Committees Key to a Board Meeting Its Fiduciary Responsibilities

Date August 11, 2022
Categories

Boards are legally liable for the actions of their organizations, and there are generally three “duties” that board members must adhere to: care, loyalty, and obedience.

  • Duty of care: Board members are expected to exercise the care that a prudent person would exercise in a like situation.
  • Duty of loyalty: Board members must act in the best interest of the organization, even if it conflicts with their own self-interests.
  • Duty of obedience: Board members must uphold the mission of the organization. Often a nonprofit board will create various committees to demonstrate its commitment to these duties.

Accountability and governance

Large or small, all nonprofit organizations should be built on a firm foundation of fiscal accountability and good governance. While the audit and finance committees both are designed and intended to help a board fulfill the related fiduciary responsibilities, the duties of each are quite different.

The Finance Committee: Tends to be more operational and is typically a standing committee of the board, meaning it functions throughout the year. Committee members work closely with management and the finance staff. Their duties often include:

  • Providing oversight in the preparation of annual operating and capital budgets and monitoring budgets to actual results regularly throughout the year
  • Reviewing internal financial statements on a regular basis
  • Overseeing the handling of all financial resources as well as any policies and procedures related to those resources
  • Advising the board on significant financial decisions, including borrowing and investing
  • Protecting the organization when a conflict of interest occurs
  • Ensuring that good governance policies referenced in Form 990 are implemented
  • Often participating in the hiring of finance and accounting team members
  • Ensuring that financial reporting requirements, including tax return filings, are fulfilled
  • Overseeing long-term financial planning
  • Monitoring cash reserves
  • Ensuring that financial activities of the organization align with its vision, mission, and strategic plan
  • Reporting to the board and/or executive committee about the financial condition of the organization

This committee may have audit responsibilities as well, including:

  • Participating in corrective action plans for problems identified in the annual audit
  • Monitoring the corrective action plans
  • Meeting with the audit team to identify financial trends identified during the audit
  • Evaluating the performance of the audit team.
  • Who should serve on the finance committee? While members should all have some expertise in financial matters, they need not all be accountants. A diverse group of financial experts—accountants, attorneys, bankers, investment advisors, insurance professionals, even directors of other nonprofits—can provide perspectives that collectively serve the committee well. As well, not all committee members need to be board members. Non-board members can be recruited based on their areas of financial expertise. In addition to financial acumen, committee members should be:

  • Independent, that is, able to make decisions without risk of conflict of interest
  • Dedicated to the mission of the organization
  • Available and willing to meet the time requirements of the committee
  • A finance committee charter is often used to clearly define the roles and responsibilities of potential committee members, and will include practical policies and procedures, such as:

  • A clear statement of the committee’s purpose and scope of responsibility
  • The committee’s relationship to the board and other committees, such as the audit committee
  • The committee’s size and the time members are allowed to serve
  • Meeting schedules
  • Reporting requirements
  • Committee governance procedures

The Audit Committee: Usually works in partnership with the finance committee, but their duties are more related to governance than operations. In high performing organizations, the audit committee helps management review and maintain the effectiveness of internal controls and external financial reporting. Audit committee duties may include:

  • Reviewing the financial statements and any other information provided to the public
  • Overseeing the organization’s internal controls and compliance with policies and procedures
  • Possibly overseeing the annual audit process, usually to ensure the objectives of financial reporting and auditing are achieved
  • Reviewing compliance documents such as Form 990 and charity filings, and recommending approval by the appropriate officer
  • Reviewing any and all fraud prevention practices and policies
  • Working with internal auditors throughout the year
  • The members of the audit committee must be independent and have financial expertise. While it is not a requirement of nonprofits, at least one member should have the skills, knowledge, and expertise to fully understand the required financial reporting of the organization. Such a “financial expert” is generally defined as someone with considerable experience analyzing, preparing, or auditing financial statements.

Since many nonprofit board members may not fully understand the nuances of the financial reports, often a member of the audit or finance committee will be relied on to interpret these reports for the board.

 

Like the finance committee, the duties and responsibilities of the audit committee are outlined in its
charter. The charter will outline the objectives of the committee, the steps to achieve each objective, deliverables, and the frequency of each action item. Many charters include calendars that specify guidelines and establish timelines and due dates for their duties. A committee charter should be action oriented, not merely a document on a shelf.

So, do you really need both? It is important to check state requirements, as some states require a nonprofit to have an audit committee once they have raised a certain amount of revenue. While it is considered an industry best practice to have both a finance and an audit committee, many smaller organizations do not have enough expertise available to have two separate committees. In that case, finance committee members typically assume the duties of both. Where both committees exist, detailed charters should be reviewed and updated regularly to clearly define the roles and responsibilities of each.

Board Orientation and Training

Since board members will have different skill sets, it may be advisable to conduct ongoing training as well as training for new members at orientation. Many board members will not have financial skills, and if they do, they might not have the financial acumen specific to a nonprofit organization. A training agenda might include:

  • A review of each committee’s policies, procedures and responsibilities
  • A review of the organization’s budget process
  • An overview of the state laws governing nonprofit finances
  • A review of terminology unique to nonprofits
  • A review of basic nonprofit financial statements
  • A review of other information a member might be asked to cast a vote on
  • Organizations can look to paid consultants, their attorneys, or their auditors to provide board training.

Board committees play important roles in both financial oversight and governance. Highly functioning board committees are key to helping a board fulfill its fiduciary responsibility.

Read the full Summer issue of Insights, the HBK Nonprofit Solutions quarterly newsletter.

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