Audit Committee of a Nonprofit Corporation: 
Purpose, Function, Authority, Reporting and Duties

by J. Nelson Irvine

With our clients in mind, we have outlined the basic purpose, function, authority and duties of an audit committee for a nonprofit corporation.  The general purpose of this type of audit committee, as distinct from its specific functions, is to assure that financial information, disclosures and reports are appropriate, reliable and competent and to assure that the operations and activities of the corporation are subjected to appropriate measures of accountability.  The usual functions of an audit committee are the following:

Function

• Accountability.  An audit committee advises and makes recommendations regarding systems of accountability in the operations and conduct of the business of the corporation and determines whether the financial information, disclosures and reports by management personnel satisfy applicable standards of accountability and applicable laws. 
• Auditor Selection and Independence.  An audit committee selects, or recommends the selection of the independent auditors; monitors and evaluates the performance of the auditors; meets periodically with the auditors; and reviews and approves or recommends the contracts with the auditors selected. 
• Internal Systems.  An audit committee reviews the criteria for selection and accountability of internal financial and management personnel who are responsible for financial information, disclosures and reporting, establishes procedures for appropriate certifications by management and financial personnel with respect to periodic reports, and, with input from the outside auditor, evaluates the accountability of management and financial personnel.
• Self Dealing and Conflicts of Interest.  The audit committee makes appropriate inquiries, investigates, if necessary, and evaluates acts of officers, directors, management and financial personnel with respect to the existence of self-dealing and/or conflicts of interest and adequacy of disclosures. 

Reporting

In general, committees of the board of directors report directly to the board.  However, in some cases, an audit committee may report directly to the Chairman of the Board or an executive committee.

Authority

An audit committee should be granted the authority to investigate any matter or activity that involves financial accounting, controls, reporting and accountability.  Officers and members of the board should refer any questions regarding the independent audit, the independent auditor or the reliability or competence of any internal personnel to an audit committee.   In larger organizations, the board of directors may delegate responsibility for selecting the independent auditor to an audit committee.  An audit committee may consider any matters delegated to it by the Board of Directors, the Chairman or the Executive Director.

Duties

The following is a list of examples of regular duties of an audit committee.

• Self Assessment.  An audit committee should annually assess its own performance and make recommendations to the board of directors for revisions or modifications in the organization, function, authority and duties of the committee. 
• Accountability Controls.  An audit committee should annually review the internal accounting and financial reporting process, including internal controls with management (executive director) and the scope and adequacy of internal controls with the independent auditor.
• Principles and Practices.  An audit committee should annually review with management (executive director) and independent auditor significant accounting and reporting principles, practices and procedures as reflected in the accounting and financial reports and information disclosures and systems of accountability. 
  Independent Audit.  An audit committee should periodically determine an appropriate process for selecting the independent auditor, and should select or recommend the selection of the independent auditor for the annual audit to the board of directors for approval or ratification. 
• Annual Audit.  An audit committee should annually determine with the independent auditor the scope and general extent of the annual audit, and review the annual audit with the auditor and management (executive director) and report to the board.   An audit committee should (as often as needed) review with the independent auditor any findings or recommendations regarding the audit process and internal accountability.
• Financial and Accounting Personnel.  An audit committee should (as often as needed) review with management (executive director) and with the independent auditor the credentials, reliability, competency and accountability of the financial and accounting personnel of the corporation.
• Appropriate Investigations.  An audit committee should (as often as needed) initiate investigations of issues involving accountability, accounting and financial reporting  disclosure, internal controls, and issues of self-dealing or conflicts of interest.

 
New Regulations on Facsimile Marketing

by Kathryn C. Johnston

As you may be aware, the Federal Communications Commission recently released a Report and Order revising its facsimile marketing rules.  These new rules require that, in order to market services through unsolicited facsimile advertisements, non-profit organizations must first obtain written permission from all parties to whom these faxes would be sent.  This differs considerably from the former rule under which permission was not necessary if the parties had an established business relationship. 

This rule was originally scheduled to become effective on August 25, 2003.  On August 18, 2003, however, the FCC, in response to a petition for clarification from the American Society of Association Executives, extended this effective date to January 1, 2005.  Although the rules will not take effect until such time, you should be aware that they exist.  We will provide further updates regarding the status of this rule as such information becomes available.

If you have any questions regarding these articles or would like a copy of the FCC documents, please do not hesitate to contact any member of our Business Organizations Group.

2003 ©Chambliss, Bahner & Stophel, P.C

This is an advertisement.  Certification as a Specialist in Business Organizations Law by the Tennessee Commission on Continuing Legal Education and Specialization is not currently available.  None of the attorneys listed in this communication are certified in any area of Specialization.