Under the California Nonprofit Integrity Act of 2004
(the Act), charities with gross revenues of $2 million or more must establish and maintain an audit committee. The $2 million threshold excludes grants received from governmental entities if the nonprofit is required to provide accounting on how the grant funds are used.
Member Composition Considerations:
- The audit committee cannot include staff members, president, chief executive ofﬁcer, treasurer or chief ﬁnancial ofﬁcer of the organization.
- If an organization has a ﬁnance committee, members of that committee may serve on the audit committee but cannot comprise 50 percent or more of the audit committee.
- Per the Act, the audit committee may include persons who are not members of the governing board. However, this is inconsistent with the California Corporations Code of 2010, which requires that a committee exercising the authority of the board shall not include as members persons who are not directors. Since finding individuals with nonprofit accounting and financial expertise can be challenging, in practice, non-board members are seen serving on the audit committee and sharing their expertise; however, they are non-voting members.
For nonprofits organized in other states, these rules may vary.
WHAT IS THE DIFFERENCE BETWEEN AN AUDIT COMMITTEE AND A FINANCE COMMITTEE?
Per the Act, the audit committee (under the governing board’s supervision) is responsible for making recommendations to the board on the hiring and ﬁring of independent certiﬁed public accountants (CPAs). The audit committee can also negotiate the independent CPA’s compensation on behalf of the governing board.
The audit committee must:
Confer with the auditor to satisfy committee members that the ﬁnancial affairs of the nonproﬁt organization are in order
Review the audit and decide whether to accept it
Approve non-audit services by the independent CPA’s accounting ﬁrm and ensure such services conform to standards in the Yellow Book issued by the U.S. Comptroller General
In general, finance committees:
- Oversee the budgeting process
- Review periodic internal financial statements to monitor financial performance
- Provide oversight and guidance over significant financial transactions
Individual state laws and regulations can impact the roles of each committee, and some audit committees expand their responsibilities to include risk management.
WHAT BEST PRACTICES SHOULD AUDIT COMMITTEES AND GOVERNING BOARDS CONSIDER?
Best practices to consider include:
- Onboarding new audit committee members. Ensure that audit committee members understand the organization’s mission, operations, funding sources and unique reporting requirements.
- Recruiting a diverse committee. Having a diverse committee in background and experience adds different perspectives and can decrease risk.
- Review the audit committee charter on an annual basis. This provides a reminder of responsibilities of the audit committee. The AICPA has a sample audit committee charter that is available to its nonprofit section members.
For more information or best practices, contact the GHJ Nonprofit Practice here.