Not-for-profit organizations are well-served by astute, ethical, and dedicated board members. Not only are these people financially savvy and accomplished, but they also share an allegiance to the organization. Therefore, encourage them to keep asking the right questions regarding the financial affairs of your not-for-profit organization.
- Ask about enterprise risk management. Not-for-profit organizations have lagged behind the business world in developing an effective process for enterprise risk management, although many non-profit clients are beginning to form committees or task forces that deal with this important issue. An effective enterprise risk management process needs the support of the board and of executive leadership, and the audit committee can champion this effort.
- Ask about information technology (IT) security. IT security is an increasingly complex and challenging issue. The constantly changing modes of information delivery and the sophisticated forms of cybersecurity attacks are becoming more commonplace. One of our IT partners likes to say that “IT control is a journey and not a destination.” Security comes at a price, and the audit committee can be instrumental in ensuring that sufficient resources are appropriately allocated to this important area.
- Ask about internal auditing. As not-for-profit organizations continue to try to do more with less, and as regulatory scrutiny continues to increase, operational and compliance audits can be a critical component of your internal control environment. Again, this is an area where not-for-profit organizations lag far behind the business world, where the benefits of a robust internal audit function have long been recognized. The audit committee should promote an internal audit and compliance function.
- Ask about board governance policies. The Not-for -Profit Revitalization Act of 2013 (NPRA), along with the two amendments adopted during 2017, includes a number of rules regarding related parties, conflict of interest policies, and whistleblower polices that became effective on July 1, 2014, with some clarifications made since. Ensure that your institution is aware of, and complying with, these requirements
- Ask about the talent and the bench strength in your business office. Your external auditors have the opportunity to work closely with your finance team and they can often share valuable insight regarding the size of your team, as well as its ability to deal with unforeseen circumstances, such as health issues or early retirement. Talk about succession planning with your external auditors.
- Ask about the IRS Form 990. The form should be made available to the full board prior to filing, and is often reviewed in detail by the audit and/or finance committee prior to distribution to the full board. Although the external auditors are not required to review this form with the committee, they can be of assistance in highlighting those areas that merit additional scrutiny. Given that the Form 990 for a not-for-profit organization may be in excess of 50 pages, a focused and informed review may be effective.
- Ask about executive compensation and about travel and expense policies. Your external auditor should be reviewing the executive director’s contract in order to ensure that salary, bonus, and deferred compensation are recorded appropriately. Your external auditor should also be looking at your travel and expense policies. Make sure that you know what policies are in place at your organization for review and approval of executive compensation, as well as travel and entertainment.
- Ask about your employee benefit plans. In 2009, the U.S. Department of Labor issued new rules requiring that certain 403(b) retirement plans with more than 100 eligible participants be audited. Ensure that the responsibility for these audits is clearly assigned. Is the audit committee responsible? Has this responsibility, in part, been delegated to a retirement committee?
- Ask for benchmarking. It is very difficult to operate in a vacuum. While not-for-profit organizations have varied missions, profiles and geography, a comparison of significant financial metrics with an appropriately selected peer group does have merit. Likewise, it is important to review the trends for your own organization over several years.
- Ask for a pre-audit meeting with the external auditor. This is a very important part of the audit process and will ensure that you have an opportunity to provide the appropriate input before the audit begins. This has long been considered a best practice, and for many it is now required by the NPRA, but not-for-profit organizations do not always incorporate this meeting into their timeline.
- Ask to meet with your external auditors in executive session at least once a year. Don’t ask your external auditors if they would like to have an executive session. Just do it. The audit process is generally transparent, but this session does provide an opportunity for the auditors and the committee to speak freely about delicate matters or to ask questions that they might be uncomfortable asking in the presence of management.
- Finally, ask questions. Make observations. The audit process works best when the audit committee is fully engaged in the audit process.
Jean Close is a partner based out of our Rochester, NY office.
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.