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Five Reasons Why Your Nonprofit Organization Should Consider Forming an Audit Committee

In times when financial reporting and accountability are under increasing scrutiny by regulatory agencies, it is vitally important to have a committee that you can depend on to actively assist in the management of risk. An audit committee can serve in this capacity and be a powerful tool for your organization whether it is public, private or nonprofit. Although many nonprofit organizations have formed audit committees in response to heightened regulatory requirements changing the marketplace, there are still a number of organizations that have not placed enough importance on corporate governance and should strongly consider doing so.

Why Should a Nonprofit Organization Consider Forming An Audit Committee?

Adopting and maintaining an audit committee is a critical component for nonprofit organizations in being able to maintain strong internal controls and build the foundation for the development of a strong corporate governance structure. Without these committees in place, organizations in the nonprofit sector are subject to additional risk and possible financial unrest. Consider the following reasons why your nonprofit organization should form an audit committee:

  1. It may be required. Certain regulatory bodies or entities you work with may require an audit committee. The organization should be informed if an audit committee is required as a condition of business arrangements. In addition, state requirements are constantly changing – be sure to check for governance requirements in the state where your 501 (c)(3) organization is registered, as well as other states where you do business or solicit donations.
  2. Potential funding sources support those who adhere to Internal Revenue Service (IRS) best practices. Although not a requirement for nonprofit organizations, Federal Form 990 asks if an organization has an audit committee. Form 990 is a public document and potential funders and others can see whether or not an organization has an audit committee and may use this information when considering a number of different nonprofit organizations. The lack of an audit committee may raise questions regarding an organization’s use of best practices.
  3. Ensure your organization’s decision makers are on-top of the latest developments in financial reporting. Of late, there has been a lot of activity with regard to streamlining accounting standards for private companies encompassing both U.S. GAAP and international standards. While the Financial Accounting Foundation’s (FAF) Private Company Council (PCC) has limited its work to private for-profit entities, it’s critically important for nonprofits to be aware of these evolving changes as they will likely have implications for nonprofits at some point down the road.
  4. Higher standards yield stronger results for your nonprofit. Implementing an audit committee allows your organization to “up its game” with better financial results awareness; decision-making abilities with regard to accuracy and quality of financial reporting; increased capacity to build strong relationships with stakeholders; and a greater ability to successfully facilitate transitions in leadership.
  5. Perception is everything. Consider perceptions of corporate governance and the potential effects on transactions involving a nonprofit organization. Simply put, nonprofit organizations that are perceived to have solid structures and follow best practices are looked upon more favorably than those that are not.

Please don’t hesitate to contact us if you would like to learn more about nonprofit governance.

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Editor’s Note: This article has been updated for relevancy and was originally published in 2015.
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