The fundamental question
Donors, lenders, governmental agencies and stakeholders are all challenging not-for-profit organizations about governance practices. With greater expectations for high performance, many organizations are evaluating which of their committees are appropriate and necessary as they balance growth and mission alignment with limited resources.
That evaluation raises an important question: Do you need both an audit committee AND a finance committee?
The simple answer is yes. Both committees are needed to help align your organization with industry best practice, manage risk, protect your not-for-profit’s good name and reputation, and provide checks and balances across financial operations.
But how do the two committees differ? Let’s break it down.
How audit committees have changed
Audit committee responsibilities have evolved over the past several years. Most audit committees have grappled with the task of overseeing risk, due to the increased operational complexities from programmatic diversity, technology advances and cybersecurity. The geopolitical environment, paired with the need for advanced skills and experience, have added to the complexity and risk.
The expanded risk requires active engagement in areas like compliance, enterprise risk management and cybersecurity, along with environmental, social and governance (ESG) reporting and monitoring.
Stakeholders rely on the audit committee to instill and promote a culture of oversight and financial stewardship. Key responsibilities include:
- Appointing and engaging with the not-for-profit’s external and internal auditors, as appropriate, and overseeing tax filings and related regulatory reviews
- Working as a delegate of the board of trustees to support appropriate financial oversight in all aspects of financial reporting, compliance, internal control and risk
- Evaluating and approving key policies for areas like accounting/finance, investments, tax, related parties/conflicts of interest, donor acceptance, regulatory matters, insurance, technology, debt and legal considerations
- Reviewing and overseeing key business risks, monitoring ERM processes and evaluation, ESG reporting and metrics, and legal/compliance activities and events like whistleblower complaints and conflicts of interest
The audit committee must be independent of the organization. Members must not directly or indirectly accept any salary or remuneration from the organization. The board treasurer should not serve on the audit committee, as a rule, because that presents an inherent conflict of interest. Some states require audit committee members to be board members, and to have financial expertise — some states also stipulate the number of committee members.
Finance committee responsibilities
By contrast, a finance committee’s primary responsibility is to monitor and approve the not-for-profit’s budget and financial results, including programmatic objectives and goals. The finance committee should provide oversight to support the organization’s application of financial integrity and appropriate use of resources in administering programs and services. This includes approving the annual financial budget, the capital spending budget and debt financing decisions.
If an organization has established a financial planning and analysis team, that team would report to the finance committee. It would share ongoing and real-time operating results compared to the budget, and update forecasts to inform future investment and programmatic decisions. Often, finance committees are responsible to monitor liquidity, manage reserves and ensure the not-for-profit has adequate resources for future program goals — with funds available for unexpected operating challenges.
The need for both
Not-for-profit organizations should establish both an audit committee and a finance committee in their governance structure. While some skills are transferrable, each committee provides an important oversight role that should operate independent of the other, acting as a system of checks and balances. These committees should work in tandem to drive financial stewardship and achieve compliance with laws and regulations. Together, they provide the board and stakeholders with confidence and transparency related to accounting, finance, compliance, technology and risk.
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