An effective audit committee can be your not-for-profit organization’s best friend, safeguarding its most valuable asset: its reputation. Audit committees are tasked with providing experience, oversight and direction. Well-run committees ensure that management implements and follows an effective system of internal controls, and that outside auditors objectively assess the organization’s financial reporting practices. Through these and related efforts, audit committees strengthen their organizations by protecting their integrity, financial health and long-term viability.

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Mayer Hoffman McCann P.C. – An Independent CPA Firm
A publication of the Professional Standards Group
An effective audit committee can be your not-for-profit
organization’s best friend, safeguarding its
most valuable asset: its reputation. Audit committees
are tasked with providing experience, oversight
and direction. Well-run committees ensure that
management implements and follows an effective
system of internal controls, and that outside auditors
objectively assess the organization’s financial
reporting practices. Through these and related efforts,
audit committees strengthen their organizations by
protecting their integrity, financial health and long-term
our roots run deepTM
be independent of the organization’s management –
meaning participants receive no financial incentives
or payment from management. The audit committee
itself also should be independent. Though it works
collaboratively with internal and external auditors
and management, the committee must be completely
separate from each of these groups.
While audit committees may include members
with varied backgrounds and experience in key
business functions, for example financial reporting
or risk management, organizations generally look
for members who possess a solid background in
business or finance, have a strong understanding of
internal control concepts, and knowledge of business
risk and compliance issues unique to the not-for-profit
organization.
At least one member of the audit committee should
have deep financial expertise, including knowledge of
financial reporting and internal controls, experience
with the audit process and working with auditors, and
familiarity with not-for-profit accounting policies and
procedures. Additionally, while most audit committee
members typically have finance, accounting or legal
backgrounds, it is oftentimes useful to also include a
member with specific program expertise.
Of course, to be effective all committee members
must understand the organization’s business model,
and the drivers impacting management’s choices in
key areas such as the selection and application of
critical accounting policies and financial strategies.
© 2014 Mayer Hoffman McCann P.C. 877-887-1090 • www.mhmcpa.com • All rights reserved.
viability.
As not-for-profits face increased scrutiny – from the
IRS; local, state and federal government; and from
donors – the pressure on today’s audit committees is
extraordinary. Each member understands it is his or
her responsibility not only to prepare accurate financial
statements, demonstrate responsible financial
management, maintain regulatory compliance and
manage operating risks, but to protect the very
essence of the organization.
Committee Composition
Audit committees vary in size based on an
organization’s complexity but typically are comprised of
three to five members, the majority of whom should be
board members. All audit committee members should
September 2014
Best Practices of Effective Audit Committees

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© 2014 Mayer Hoffman McCann P.C. 877-887-1090 • www.mhmcpa.com • All rights reserved.
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Primary Audit Committee Responsibilities
Though audit committees have numerous
responsibilities, three stand apart: representing
the board in “overseeing the establishment and
implementation of accounting policies and internal
controls aimed at promoting positive financial
stewardship;” initiating the conversation on business
risks; and overseeing compliance.
Financial stewardship
Audit committees are charged with protecting the
organization’s assets, mitigating fraud risk, and
ensuring the accuracy of financial reporting. To do
so, effective audit committees closely monitor the
findings of the internal and external auditors charged
with testing the organization’s internal controls and
risk management procedures. Audit committee
members should meet regularly with internal auditors
and at least twice a year with external auditors to
discuss work plans and review audit findings prior to
presentation to the full board of directors.
Business risk
Audit committees lead the discussion on business risk,
exploring how the organization plans for known and
potential risks. To do so, audit committee members must
thoroughly understand the organization’s investment
practices, disaster recovery plans, donor and grantor
requirements, charitable registration practices,
insurance coverage, adherence to tax regulations and
most significant, the not-for-profit’s risk tolerance. For
greatest effectiveness, the audit committee should
work closely with other board committees that may
have a hand in addressing business risk, for instance
the investment, development and/or human resources
committees.
Compliance
To be effective and truly help its organization, an
audit committee must be keenly aware of compliance
issues. Committee members must understand
not only the regulatory standards that affect the
organization, but how the organization conforms
to those standards and how internal and external
auditors assess the performance of the organization
regarding these regulatory matters. While the size
and type of organization will influence the audit
committee’s specific duties, every audit committee
will have a role in helping its organization comply with
rules regarding financial accounting, reporting, billing,
spending, investing, and program reporting.
Executive Sessions
Executive sessions offer audit committee
members the opportunity to query members of the
management team and external auditors on various
risk management-related subjects. These sessions
are intended to allow for a free exchange of ideas on
sensitive subjects in a non-threatening environment.
In fact, the sessions are specifically designed to
provide participants the opportunity to offer candid
views on sensitive issues that may be inappropriate to
discuss in an open forum.
That’s why it is important to consider the participants,
and perhaps conduct meetings between individuals or
groups. For example, if an audit committee member
wants to discuss an issue with the audit firm of a large
not-for-profit, the CFO and members of management
should not be present so that the audit firm and
members of the audit committee feel at ease and are
willing to be open in their discussion.

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Posing questions
The audit committee should take into consideration the
organization’s mission, the competitive environment in
which it operates, the current economic climate, and
similar factors when crafting questions to pose during
an executive session. It is important that questions
foster an open dialogue between committee members
and members of the audit team.
It is imperative that committee members possess
sufficient financial expertise to understand the issues
and formulate appropriate follow-up questions, as
well as take any further action, as needed.
While the list of potential questions is endless, here
are a few examples of the types of questions typically
posed by audit committee members in executive
sessions:
• Are you aware of any situations of revenue or
expense manipulation?
• Is the organization taking a critical look at its
business model? Or, is it just looking for short-term
solutions that may not be sustainable?
• Are resources (people, assets, cash flow, etc.)
sufficient to meet the mission of the organization?
• Is risk management part of the organization’s
culture? Are other organizations looking at their
risks in a holistic way, including operational
and financial risks that range from possible to
unimaginable?
Enhancing Effectiveness
The most effective audit committees routinely perform
self-assessments to evaluate whether their individual
members, as well as the group as a whole, possess
the knowledge necessary to respond to the business,
reporting, technical or other key issues facing the not-for-
profit organization.
For More Information
Audit committees play a pivotal role in steering today’s
organizations, and a committee’s diligence and
effectiveness can greatly enhance or detract from a
not-for-profit’s success. For guidance on establishing
a new audit committee, or assistance enhancing the
performance of one that already exists, please contact
Michelle Spriggs of MHM’s Professional Standards
Group or your MHM service professional. You can
reach Michelle at mspriggs@cbiztofias.com or
774.206.8336.
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
© 2014 Mayer Hoffman McCann P.C. 877-887-1090 • www.mhmcpa.com • All rights reserved.
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Please contact your MHM auditor to further discuss the impact on your audit or audit report.