Role of a Nonprofit Board

Role of the Board, finance committee, and the audit committee

The Sarbanes-Oxley Act (“Act”) reshaped the landscape for board oversight of for-profit companies in the aftermath of the financial scandals that marred the early 2000’s. Though the Act does not directly affect not-for-profit organizations, the Act’s rules relating to board governance have impacted the roles of the board, the finance committee, and the audit committee of these organizations. These three bodies work together in tandem to provide oversight and guidance to their nonprofit organization.

Board of Directors

The board of directors has a fiduciary responsibility to the organization and is therefore obligated to act in the best interests of the organization. The board of directors is comprised of individuals who seek to further the organization’s mission in an oversight and advisory role. Although there is no limit on the number of individuals who can sit on an organization’s board of directors, an individual’s position on the board is limited, usually to a few years. A common practice is to have only a certain number of board members meeting their term limit in any given year so that the individuals who comprise the board do not change significantly on an annual basis. This governing body is distinctly different than the organization’s management, as the board focuses on the organization’s overarching mission, strategy, and long-term goals. In comparison, management carries out the goals set out and defined by the board of directors.

The Finance Committee

Depending on the size of the organization, the finance committee is sometimes combined with the audit committee. When operating separately from the audit committee, the responsibilities of the finance committee encompass all things relating to the financial health of the organization. First, the finance committee reviews the organization’s budgeted financial statements and seeks to understand the budget to actual variances throughout the year. Second, the finance committee counsels the board on any financial decisions for the organization. Examples include advising the board on the organization’s investment portfolio, recommending compensation for the organization’s management, and understanding the organization’s books so that they can ensure the financials are accurate and reflect the true activity of the organization for the year. Third, the finance committee is the committee that determines the policies and procedures that are reviewed by the audit committee. Examples of policies and procedures include their conflict of interest, document retention, whistle-blower, and other policies or procedures whose existence is reported for public disclosure on the annual Form 990. Additionally, this committee monitors the organization’s compliance with any laws and regulations and is responsible for reporting any deficiencies to the board at large.

The Audit Committee

The audit committee works with management to review all forms of the organization’s financial statements and annual tax filings in order to obtain an understanding of such documents. The audit committee disseminates the relevant information through the proper channels and to the appropriate people both at the organization and with the independent auditor. The audit committee directly engages an independent auditor and monitors the audit process. Upon completion of the audit, members of the audit team, usually the engagement principal and a lead member of the team, present a draft of the audited financial statements to the audit committee. It is the responsibility of the audit committee to review and understand the audited financial statements, and once they are satisfied with the draft audited financial statements, will recommend approval to the board. Another main role of this committee is to supervise the organization’s internal controls for financial statement reporting. The audit committee is also actively involved in assuring that management is compliant with the organization’s policies and procedures and takes an active role in reviewing those policies, examples of which include whistle-blower policies, anti-fraud policies, and other various policies that serve to guide the organization in the event of a discovery of errors or illegal acts. As a result, the audit committee is a key participant in any resulting investigations or legal proceedings brought against the organization.

The board, the finance committee, and the audit committee allow an organization to be more accountable and transparent and help the organization be successful when working towards its mission. Even though not all organizations are large enough to have all three bodies, all organizations should have a board of directors that acts in all capacities and that is separate from management. The board should have a top-level focus while the management implements the daily operations to achieve the overarching goal set by the board. For additional information or questions please contact your HBK advisor.