Our nonprofit clients often tell us their boards are being asked to take on more financial oversight than ever. Below, we’ve shared an overview of why a strong audit committee matters, who should serve on it, what it’s responsible for, and the coverage options that can help protect your organization from losses. In over a century, we’ve seen how good governance and the right protection work hand in hand.
The Importance of an Audit Committee
In recent years, several companies have found themselves in the media for illegal business activities. In response to these events, organizations are recognizing the tremendous value an audit committee brings to their company. These committees serve to ensure that all financial dealings are legal and ethical, and assure that there is no fraudulent behavior within the company. Businesses have also responded to the regulations set forth by the Sarbanes-Oxley Act of 2002. The Act outlines standards regarding financial dealings and auditing procedures within publicly traded companies. However, several provisions also apply to nonprofits, which instruct organizations to establish concrete auditing procedures. For instance, it provides explicit provisions for electing audit committee members, protections for whistle-blowers and regulations regarding the destruction of documents. As a result of notable scandals, nonprofits must remain educated concerning the design and responsibilities of an audit committee to ensure that their organization remains financially strong and responsible.
Audit Committee Members
According to the Sarbanes-Oxley Act, a company’s audit committee must be comprised of members of the board of directors who are also considered “independent.” This means that committee members must not receive compensation for their services on the audit committee or within the organization in another function, except if they are paid as a board member. Generally, though, members of the board are volunteers and do not receive compensation. The committee must also contain one designated finance “expert” who interfaces with the auditor. This person must have the knowledge and ability to analyze financial documents. The other members should also be financially competent enough to make sound financial decisions. Specifically, they should be able to select a credible auditing firm and understand the audit data once it is completed.
Responsibilities
Nonprofits conduct audits through an outside professional, with that auditor’s purpose being to discover any fraudulent activities within the organization. The auditing committee will then work with the auditor and the board of directors to identify financial red flags and ensure that all aspects of the organization are operating legally. In addition, the auditing committee supervises the organization’s management and oversees the finance reporting procedures, including the following duties:
Selects the outside auditor without management input to ensure there is no conflict of interest
Works with the auditor to regulate the organization’s finances on a regular basis and especially at the end of the fiscal year
Establishes a level of openness within the organization, and encourages employees and board members to speak up about any fraudulent activity
Monitors the organization’s operations and risk management controls
Ensures that all financial reporting within the organization complies with federal and state regulations, and follows the doctrines established by the board of directors
Insurance Options
There are several insurance options available to combat losses in the event of fraudulent activity. These coverage offerings, along with an audit committee, can add financial security to a nonprofit organization:
Employee dishonesty insurance — This coverage can provide financial protection for the organization in the event of fraudulent activity of one or more employees, including loss of funds, property and securities.
Fiduciary dishonesty insurance — This coverage can help reimburse the loss of assets from an ERISA plan in the event of theft or larceny by an employee of the organization.
Fiduciary liability insurance — This coverage can help protect employee welfare and pension plans, the organization itself and the individual fiduciaries of the plans. It covers any liability resulting from violations of responsibility, obligation, or duties imposed upon fiduciaries by ERISA.
For More Information
Contact us today for more information about the best coverage options to protect your nonprofit organization.
Want to talk through how these considerations apply to your organization? Explore our coverage for social services & charitable organizations or reach out to our team. No pressure, just a conversation about what makes sense for your organization.
This Risk Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2023 Zywave, Inc. All rights reserved.