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Audit committees face many challenges, especially when the members are volunteers with other “day jobs,” as is true in most nonprofits. And when it comes to accounting, other than one plus one generally equally two, there are constant changes in standards and processes.
While this article focuses on tools that a nonprofit audit committee might use to improve performance, evidence that nonprofit governance is improving, in general, can be found in the Grant Thornton Governance Survey:
There has been a clear increase in the percentage of audit committees that include certified public accountants (CPA). Nearly three-quarters (74 percent) of responding organization include a CPA, which is up from two-thirds in 2008 and about one-quarter in 2006.
According to the Grant Thornton survey, more than half (52 percent) of audit committees met with their auditor either two or three times, which is up from 44 percent in 2008 and 35 percent in 2004. Conversely, the number of single meetings with the auditor is shrinking.
The AICPA (American Institute of Certified Public Accountants) Audit Committee Toolkit: Not-for-Profit Organizations (Toolkit) was created in 2005 to help committees, auditors and management in fulfilling the critical governance responsibilities of the committee. It can be used by all nonprofits regardless of size.
The task group members were very intentional in including language on applicability of each of the resources so they could be used by organizations with various budget sizes and staffing configurations. Just because a nonprofit is small doesn’t mean it isn’t required to be compliant or aware of best practices.
The Toolkit includes many customizable tools and guidance on how to handle certain issues specific to nonprofits. It is also a good resource for nonprofit board and audit committee members, so they are clear on what the governance expectations are in this area.
If a nonprofit does not have a separate audit committee, the duties referenced in the charter will need to be taken on by the finance committee and/or board of directors as discussed as part of the organization’s risk management. This resource can also be valuable to the C-Suite/C-Level staff within a nonprofit. Knowing the recommended practices and compliance issues can help staff change systems and record retention practices, as well as provide support to the board and committees in carrying out their responsibilities.
Finally, both internal and external auditors can benefit from the Toolkit. External auditors can share this information and provide guidance to their clients. Internal auditors can use it as a personal roadmap and to educate other organizational staff.
Toolkit revisions
The original Toolkit was developed using the Toolkit for public companies as a model. Tools were restructured taking into account intricacies of nonprofits. Some tools were added, such as the tool for unique transactions, to ensure the toolkit was as complete as possible for all nonprofits.
The Second Edition was reorganized to better align the tools into natural categories. Details of each section are discussed below. In addition, the task group refined the tools, adding more details and clarifications, with particular emphasis on enterprise risk management (ERM). Finally, the tools have always been provided free of charge in Word format, to enable nonprofits to download and customize them for their specific organizations and situations.
The tools from the Second Edition are also provided free, but they are now housed in a different section of the AICPA’s website. Links to the tools for download, as well as the hard copy for purchase are listed below.
New Structure, Tools and Resources
The revised Toolkit has a new structure, which is broken down into five sections:
Part I of the Toolkit, Audit Committee General Considerations, has six resources. A full review and updates were made to four of them, which include:
In addition, two new resources were added:
Part II of the Toolkit, Audit Committee – Management and the Organization, has four resources.
A full review and updates were made to three of them, Management’s Report to the Audit Committee, Independence and Related Topics and Unique Transactions and Financial Relationships.
The Management’s Report to the Audit Committee tool is more interactive and useful in how to go about identifying issues versus just defining and reporting them. Independence and Related Topics resource provides an overview of issues of independence, as well as a sample conflict of interest policy. Unique Transactions and Financial Relationships describes the types of transactions and relationships unique to nonprofits, as well provides sample questions that can be asked of management understanding this unique arrangement.
One new resource was added, a Sample Document Retention and Destruction Policy, which provides sample language, minimum requirements for documents, and specific resources on the topic.
Part III of the Toolkit, Internal Controls and Internal Audit, has five resources and did not see many changes. The tools were reviewed and tweaked slightly to include focus on ERM. These tools include:
Part IV of the Toolkit, External Auditors and Resources, has seven resources. No new resources were added, but the tool developed to assist nonprofits in searching for CPA services was updated to include an initial request for qualifications. This was intended to make the process more efficient for both the nonprofit and any potential service provider, allowing initial and basic qualifications of the service provider to be examined before requesting a full proposal. This tool is now entitled Sample Request for Qualifications and Request for Proposal Letter for CPA Services.
The remaining tools are:
Points to Consider When Engaging External Experts and Advisors – This resource is intended to assist the audit committee in understanding the process of engaging external experts and advisors.
Additional resources are included in the appendices, Part V of the Toolkit, and information added here, such as Analytical Procedures for Not-for-Profit Organizations and the Sample Not-for-Profit Audit Committee Charter is indicative of the task group’s desire to provide as much guidance as possible for audit committee members.
Audit committees should remain informed of sector trends. Over the past several years there has been much focus at the federal level on appropriate nonprofit governance and accountability. The first legislative reform of the nonprofit sector since 1969 occurred in the Pension Protection Act of 2006, with major provisions of the Act focusing on nonprofit oversight and accountability. In 2009, the Internal Revenue Service (IRS) introduced a revised Form 990, adding questions regarding governance and accountability. These revisions were clearly intended to add another level of transparency regarding an organization’s governance and oversight.
In addition to remaining informed of these types of issues at the federal level, committees should be aware of state legislation and regulations that may apply to their organizations. For instance, the State of California, mirroring the federal Sarbanes/Oxley legislation, enacted the California Nonprofit Integrity Act of 2004. While this legislation was enacted in California, it applies to organizations based in California and those that do business or raise funds in California, even if they are not based there or have no nexus in the state.
This act not only specifies which organizations are required to conduct an external audit, it also dictates audit committee composition.
Audit committees must also be aware of accounting pronouncements and statements pertaining to governance. According to Statement on Auditing Standards (SAS) 115 issued by the AICPA, meetings and communications between the audit committee and external auditors are now required and must be documented. While some have interpreted that meetings are only required post-audit, it’s always a good idea for the committee to meet pre-audit to discuss the audit plan and execution with the external auditors.
Finally, executive sessions provide the opportunity to ask open-ended questions in a safe environment. A good practice for audit committees is to hold executive sessions with various members of management, the financial management team, internal audit if applicable, and external auditor. Regardless, executive sessions should be held at every audit committee meeting involving external auditors and anyone who is not a member of the audit committee should be asked to leave the meeting.
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Ellen Hobby is chief operating officer and chief financial officer of the National Academy for State Health Policy (NASHP), a nonprofit with offices in Portland, Maine, and Washington, D.C. Her email is ehobby@nashp.org. Cheryl R. Olson, CPA, is the director, council financial consulting, for Girl Scouts of the USA, headquartered in New York City. Her email is colson@girlscouts.org.
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