Audit Committees are generally responsible for:
• Hiring, evaluating, and recommending the retention of an outside CPA firm. See Evaluating the external auditors (AICPA).
• Evaluating whether staff is cooperating with external CPA and whether there is an effective flow of information between staff and CPA firm.
• Reviewing and recommending policy or procedure changes that enhance compliance with accounting requirements. See Committee Charter for Audit Committee.
Some organizations use the audit committee as the compensation committee to review and recommend approval of the appropriate compensation and benefits of the executive director or CEO. Some organizations use the audit committee as a sort of “ombudsman” and channel complaints to the audit committee for the committee’s investigation and resolution.
An audit committee is not a strict requirement for federal tax-exemption; however, the IRS has signaled its encouragement of audit committees, consequently every tax-exempt organization that does not already have an audit committee should strongly consider creating one. See Corporate Governance for Nonprofits Series (ProBono Partnership).
Who should serve on an audit committee?
Typically the audit committee comprises board members and other individuals not paid by the nonprofit. In order to function effectively, the committee needs to be independent (e.g. not paid or compensated by the nonprofit.)
Ideally, those serving on the audit and finance committees of a nonprofit possess what is termed, “financial literacy.” A financially literate board member is one who can look at the organization’s budget and recognize whether there are warning signs. The American Institute of Certified Public Accounts has compiled a Toolkit for Nonprofit Audit Committees.