I recently received a call from the newly-appointed chair of the audit committee of one of my clients. He was looking for some guidance on his new role. He began the conversation by saying, “I missed the Board meeting where committee assignments were being made and I ended up as the chair of the audit committee.” I hoped he was joking, but am afraid based on conversations I have had with CEOs and CFOs of my nonprofit clients that all too often, the audit committee is comprised of the Board members who objected the least to serving in that role!
So if finding willing, engaged audit committee members is a challenge for many organizations, what traits should organizations look for?
- Members should first and foremost understand the organization’s mission and understand the industry in which the organization operates. It is through understanding these elements that the committee members have a frame of reference for discharging their responsibilities on the audit committee.
- Members should understand who the organization’s internal and external stakeholders are. The audit committee’s ability to work closely with all stakeholders and understand their concerns will make the committee more effective at managing risk for the organization.
- Members should be committed to setting the appropriate tone at the top, ensuring the organization acts responsibly in all matters. This involves asking tough questions and being engaged in understanding what the risks to the organization are.
- Members should be independent of management and free of any conflicts of interest with the organization. Factors that likely impair independence include employment within the past three years, family relationships with management or direct business relationships occurring within the last three years. Members should resist any attempts by management to override or undermine their authority.
- Members should be heavily involved in understanding the financial statements of the organization and the control environment that exists. They should be able to read and understand nonprofit financial statements. They should be willing and able to engage in probing discussions about the finances of the organization, and must understand the financial risks to the organization. It is sometimes a challenge for organizations to find members who have the requisite financial expertise, and for that reason, it is a best practice that the audit committee be supplemented with a financial expert.
See our new online guide, Effective Audit Committees for Nonprofit Organizations, for a useful decision tree that can help you determine if someone has the requisite knowledge to serve as a financial expert. The financial complexities that most organizations face today make having a financial expert on the audit committee extremely important.
A well balanced audit committee should consist of a financial expert, in addition to two to five other members with diverse backgrounds. This means that each member of the committee will possess the above traits to differing degrees, but the sum of the members’ collective experience will result in a highly effective audit committee.