All successful organizations are built on a foundation of fiscal accountability and good governance. The bedrock of this foundation is strong internal controls. Every team member is responsible to some degree for upholding their organization’s internal controls, but the board of directors plays a key role in ensuring the organization is accountable for financial and programmatic outcomes to all its stakeholders.
If your organization is unsure about the strength of its internal controls and the roles necessary to uphold them, forming an audit committee is a great way to gain clarity.
According to the American Institution of Certified Public Accountants (AICPA), an audit committee provides the following five benefits:
- Provide actionable insights to oversee and improve financial practices and reporting.
- Create and maintain effective anti-fraud programs.
- Enhance the internal audit function.
- Oversee the organization’s external audit.
- Strengthen credibility with stakeholders.
For an organization to benefit from an audit committee, it must provide adequate collaboration and resources for the group to effectively do its job. The responsibilities of an audit committee can differ, but there are two essential tasks that almost all committees perform:
1) Review Financial Reporting and Audit Process
The first main responsibility of an audit committee is to oversee the accounting and financial reporting process and audit of the entity’s financial statements by an independent auditor. The committee should fully understand how internal controls are flowing through the accounting and finance areas of their organization. To achieve this, interaction on a regular basis with the director of finance or CFO is needed to confirm their level of comfort with completeness, accuracy, validity, and maintenance of the system of internal controls. If an organization has adopted an internal control framework such as COSO, the audit committee should be made aware.
The audit committee is also accountable for performing ongoing reviews of management issue reports, letters and disagreements from the independent external auditors. The external auditors must keep the committee advised and updated regularly on their consideration of internal control. If there is an adverse report on internal controls related to financial reporting, the audit committee should take steps to ensure that a plan is in place to correct the weakness.
2) Monitor Compliance of Board Policies
The second main responsibility of an audit committee is to monitor compliance with the policies adopted by the board of the organization. Policies set by the board typically include the following:
- Conflict of interest
- Document retention and destruction
- Whistleblower policy (and process)
- Nondiscrimination (suggested)
- Code of ethics (suggested)
The audit committee ensures that these policies are living documents, meaning that they are regularly reviewed and updated as needed to adhere to changing regulations. The tone at the top of the organization is crucial for creating a culture of ethical behavior and the audit committee plays a key role in setting those expectations and making sure that all employees, volunteers, and stakeholders understand these policies and procedures.
If your organization does not currently have an audit committee and you are unsure where to start, creating an audit committee charter matrix is a great way to set the plan in motion. A charter matrix is an industry best practice that establishes the committee’s key responsibilities and defines the accomplishments and deliverables committed to by the committee. Like an organization’s policies, the matrix is a living document that helps in managing meetings and other procedures efficiently and effectively.
Remember the importance of an organization’s foundation mentioned above? Achieving this elusive goal requires more than just insights into the sector and trends in business. An organization’s foundation must be supported by sound internal controls, legal and budgetary compliance, financial reporting and compliance, sound business practices, and a culture of uncompromised moral and ethical behavior. Successful organizations can access expertise in all these areas by leveraging the knowledge and expertise of audit committees.
BerganKDV has a team of audit experts who have served on committees and understand the importance of strong internal controls. We would be happy to assist you in establishing or redeveloping an audit committee at your organization. If you have questions regarding audit committees and evaluating your internal controls, we’re here to help. Let’s have a conversation!
