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Audit committees: oversee compliance – state regs

April 11th, 2018

All New York tax-exempt organizations are subject to the requirements of the Nonprofit Revitalization Act (NPRA) of 2013. The initial effective date of the NPRA was July 1, 2014. However, many organizations do not know that the NPRA has been amended twice, with a new effective date of each amendment of May 27, 2017. Accordingly, if your organization has a calendar year end, there will be a financial statement audit conducted by your external CPA firm over the next few months. It is important for board—particularly the Audit Committee—and management team members to be fully aware of the amendments and compliance with their requirements.

The primary impact of the NPRA amendments involved a modification of the definition for an “independent director” and further clarification regarding certain of the provisions of the initial legislation.

By way of background, anyone who has read the 73 pages of initial legislation knows that the act had nothing to do with “revitalization.” The primary focus of the legislation was on the following areas:

  • Conflicts of interest
  • Related party transactions
  • Executive compensation
  • Audit Committee responsibilities
  • Internal controls and accountability

In addition to the initial legislation and the two amendments adopted during 2017, the New York State Charities Bureau issued additional guidance with respect to NPRA compliance in the following areas:

  • Audit Committees and the Nonprofit Revitalization Act of 2013 (February 24, 2015)
  • Procedures for Forming and Changing a New York Not-for-Profit Corporation (February 24, 2015)
  • Internal Controls and Financial Accountability for Not-for-Profit Boards (April 13, 2015)
  • Conflicts of Interest Policies Under the Nonprofit Revitalization Act of 2013 (April 13, 2015)
  • Whistleblower Policies Under the Nonprofit Revitalization Act of 2013 (April 13, 2015)

For these and further updates, including detail regarding the 2017 amendments, go to

Pay particular attention to the new and more flexible definition related to “independent directors.” The definition is too long and complicated to be repeated for this article.

However, the NPRA amendment related to independent director definition has made it more reasonable for tax-exempt organizations to populate their Audit Committee with “independent” board members. As you proceed through your 2017 audit process, be sure to maintain compliance with the NPRA legislation as amended.

One of the specific requirements of NPRA that has been generally overlooked is the focus of this column regarding requirements assigned to the Audit Committee. Specifically, the Audit Committee must, on an annual basis, document their evaluation of the performance of the external audit firm.

In response to many requests from our tax-exempt clients, we have developed an electronic template that provides specific guidance to Audit Committees in fulfilling their NPRA responsibility related to auditor performance evaluation.

Evaluation of auditors from a board volunteer perspective is inherently difficult. Therefore, the following questions should be answered by the committee. We also recommend that senior management, particularly the CEO and CFO, should complete this questionnaire as well. Any “no” answer requires follow-up and, preferably, direct conversation with the audit partner.

  1. Do the independent audit firm and the personnel assigned to the audit have significant background and experience in the industry / service sector of our organization? Does senior management, particularly the CEO, CFO and compliance officer, believe that the independent auditors have been sufficiently thorough in their audit scope, approach, and testing?
  2. Do board/Audit Committee members believe that the independent auditors have been sufficiently thorough in their audit scope, approach, and testing?
  3. Do the board/Audit Committee members believe that the independent auditor has and continues to maintain a transparent and candid relationship with board leadership, particularly with respect to the value and clarity associated with independent auditor presentations to the full board and Audit Committee?
  4. Has the Audit Committee inquired of the independent auditor and obtained a copy of the most recent peer review letter together with any findings?
  5. Has the Audit Committee ensured that the audit firm peer review letter is dated within the last three years?
  6. Has the Audit Committee verified that the auditor is independent from the organization by evaluating the amount of consulting / advisory fees in relation to the audit fee arrangement?
  7. Were the audited financial statements presented on a timely basis and issued by the auditor in an appropriate time frame following the Audit Committee presentation?
  8. Was the auditor’s presentation of the audit results clear, informative and understandable to Audit Committee members?
  9. On an overall basis, do the board/ Audit Committee/management team members believe that the independent audit firm provides a thorough and technically correct set of report deliverables, while at the same time providing value-added observations and recommendations at a fair and reasonable cost?

These questions should be answered after the final audit presentation and the required NPRA Executive Session between the “independent” Audit Committee members and audit firm representatives. This completed document should be maintained as an addendum to the Audit Committee minutes. The world of nonprofit auditing and financial reporting continues to increase in complexity. An Audit Committee, as well as the full board of directors, must understand that simply being a CPA firm does not necessarily qualify that firm as a capable auditor of your tax-exempt organization. For this reason, each and every CPA firm should welcome the required scrutiny of an Audit Committee annual evaluation of their performance.

The auditor performance evaluation requirement is just one of many NPRA requirements that have been assigned to the Audit Committee. The primary additional requirements include, but are not limited to, the following:

  • Oversight and review of conflict of interest policy and related disclosure statements
  • Review and recommendation related to specific conflict of interest transactions
  • Review and recommendation regarding each related party transaction
  • Evaluate the performance of the auditors
  • Ensure Compensation Committee compliance
  • A process for identifying “independent directors” in accordance with NPRA’s revised definition

It is considered to be a best practice for the Audit Committee minutes to document that the above responsibilities have been completed with the following attestation documented in the minutes: “The Audit Committee hereby documents that it has fulfilled its responsibilities related to review, oversight, and approval of the areas listed above during the fiscal year ended xx/yy/zzzz.”

We have also prepared an updated NPRA compliance checklist reflecting the requirements of the 2017 amendments. If you would like a copy of the auditor performance evaluation template and/or the NPRA compliance checklist, please email me at

Gerald Archibald is a partner serving both of our Rochester, NY, and New York City offices.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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