Organizing an Audit Committee

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If the board of directors decides to appoint an audit committee, the board must ensure that the audit committee is constituted in a way that is consistent with state law. (For instance, in some states only board members may serve on standing committees of the board. In other states, standing committees may be comprised of non-board members.)  Audit committees are typically made up of three to five members. (Remember that none of the members should be employed by the charitable nonprofit or audit firm in order to maintain the independence of the audit committee.)

To remain independent, audit committee members should not be engaged by the nonprofit to perform unrelated services or accept any consulting, advisory, or other fee from the charitable nonprofit for serving on the audit committee. (The one exception to this would be if the board members of the nonprofit are compensated for their service as a board member, which is the practice of only a small minority of charitable nonprofits.)

Ideally, the audit committee (as with the entire board) will be “financially literate” and at least one member will be  very comfortable with the nonprofit audit process. In a perfect world the entire board, especially the audit committee members, would have:

  • An understanding of the basic accounting standards applicable to charitable nonprofits;
  • Familiarity with developing and implementing internal financial controls and procedures;
  • The ability to evaluate and interpret basic financial statements, such as a) balance sheet, b) statement of revenues and expenses, c) statement of changes in net assets, and d) statement of cash flow.

Resources for Recruiting and Supporting an Audit Committee

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