Nonprofits may not face the same government regulations or public scrutiny as for-profit public companies do. But that doesn’t mean your board can afford to get slack about financial governance. Donors and watchdog groups are paying increased attention to organizations’ Forms 990 and the media is quick to pounce on rumors of fraud or other financial wrongdoing in the nonprofit sector.
If you don’t already do so, consider regularly evaluating your board’s financial oversight. Whether you have a finance or audit committee — or both — how well their members carry out their duties is critical to your organization’s continued well-being.
Unlike for-profit public companies, nonprofit boards aren’t required to have an audit committee, but many nonprofits have added one anyway. Finance committees are still more common in the nonprofit world, but they’re generally concerned with financial operations and the practical details of funding their organizations’ missions. For their part, audit committees focus on internal controls and financial compliance matters. (See the sidebar “The difference between finance and audit committees.”) Together, these committees — along with the rest of your board — should ensure that your nonprofit has reliable operating cash flow, avoids unnecessary risk and adheres to commonly accepted accounting policies.
Because your board’s financial decisions trickle down to every function of your organization, try to hone in on activities that your finance and audit committees have the most direct influence on. For example, does your nonprofit have an operating reserves policy and are your reserves adequate? Does your outside auditor always issue clean reports? If not, how have auditor concerns been addressed? Are Forms 990 and other government reports filed on time? Is your executive director’s compensation “reasonable” compared with compensation offered by your organization’s peers?
If you start spotting negative patterns, dig deeper. In most cases, audit and finance committee members aren’t intentionally negligent. They may not have the time or energy that your organization’s financial governance requires. More likely, they don’t know enough about the complex tasks they’ve been assigned. Some simply may not have a relevant background, while others may not have received a proper orientation when they joined your board.
Staffing your committees
If your nonprofit’s central problem is finding qualified board members to sit on financial committees, you’re not alone. But it’s important to have at least a few qualified people on your board. Good candidates understand and can interpret financial statements and have at least a basic knowledge of accounting principles. They should also be able to recognize key nonfinancial indicators that measure the success of your mission — such as paid hours vs. volunteer hours and grants applied for and received. What’s more, they should be willing to ask questions and use financial information to establish economically sound policies that further your nonprofit’s mission.
Financial professionals such as CPAs, bankers and company controllers or CFOs usually fit the bill. But you might also look to attorneys who specialize in financial transactions or insurance professionals, who, after all, have extensive risk-management experience.
Once you’ve found new board members who meet your criteria, train them on your organization’s issues. If they’re new to nonprofit governance, you may need to explain such concepts as the differences between restricted and unrestricted funds and accounting rules for pledges, endowments and charitable gift annuities. Also, cover areas such as the function of the audit committee and financial management team, cost-benefit analysis and tax-exempt status.
Hiring an advisor
If your board’s fiscal oversight is failing to make the grade and you’re having trouble finding qualified individuals to staff your finance or audit committee, there’s another option. Consider contracting with a CPA to act as your board’s independent advisor. This expert can provide financial expertise and act as a liaison between your finance or audit committee and the full board of directors or staff. To ensure independence, your advisor shouldn’t work for the same accounting firm that provides you with audit or other significant accounting services.
The difference between finance and audit committees
If your nonprofit board already has a finance committee, does it also need an audit committee? Both work to ensure that an organization operates in a fiscally responsible manner. But their objectives and responsibilities can be quite different.
Finance committees primarily oversee the financial elements of running an organization and supporting its mission. They prepare operating budgets guided by long-range objectives, and develop and monitor plans to meet their nonprofit’s current and future needs. In addition, finance committees are responsible for:
- Setting investment policies,
- Overseeing income-generating activities,
- Authorizing large expenditures,
- Managing cash,
- Negotiating debt, and
- Presenting regular financial reports to the full board of directors.
Audit committees, on the other hand, set and enforce the controls needed to run an organization according to the finance committee’s policies. They’re responsible for establishing internal control policies and monitoring compliance with them. Audit committees also appoint and oversee external auditors and approve their compensation and retention. If necessary, committee members investigate allegations of financial wrongdoing.
A good finance committee makes the job of the audit committee easier. And a diligent audit committee allows the finance committee to function more efficiently and focus on its nonprofit’s mission.