KASL

WESTON COUNTY EXTENSION REPORT

BILL TAYLOR
10/5/10

THE ROLE OF THE AUDIT COMMITTEE

In 2002 the Sarbanes-Oxley Act was passed by Congress to deal with poor or improper

accounting practices of corporate and nonprofit boards. Consequently, the implementation of

auditing committees within organizations has increased greatly.

The growing demand by the public and governmental regulatory agencies for transparency and

accountability by public boards has challenged audit committees to be more proactive.

Thomas J. Raffa, President and CEO of RAFFA, PC., provides a list of “must-do’s” for audit

committees:

1. Oversee the external audit process

The appointment, compensation, oversight, and retention of the independent auditor is

the direct responsibility of the audit committee, not that of management. However,

many nonprofits have not yet formed audit committees, and may still depend on the

management or director to procure an auditor, oversee their activities, and receive the

final report.
Audit committees should be involved in the selection of the auditor, should participate

in a planning meeting with the auditor to understand the process and provide insight on

risks that may exist in the operation of the organization.

When the audit is complete a report should be made to the committee by the auditor,

including:

 All critical accounting policies and practices

 The strengths (or weaknesses) found within the internal control structure

 Alternative treatments of financial information with generally accepted

accounting principles employed by management and the ramification of their

use over methods preferred by the profession and by the auditor

 Other matters of formal communications including

o The representation letter signed by management

o The letter to management and the full board covering suggestions for

improvements to the systems of internal controls and in the financial

accounting and reporting processes

o A schedule of adjustments proposed by the auditor and details of any

unadjusted differences

After completion of the audit, the audit committee should meet in session with the

auditor, without the presence of management, so the auditor can speak directly and

freely about matters concerning management. Such matters might include:

  Any disagreements that may have occurred with management

 Any major issues that may have been discussed

 Whether the auditor is aware of management seeking consultation from other

external accountants

 The capabilities of management and the finance department as it pertains to

their contribution to the success of the audit

2. Oversee the financial reporting process

In addition to the audit, it is important the audit committee, in conjunction with the

finance committee, determine the financial reporting process required by the

organization throughout the year. This usually consists of monthly, quarterly, and

annual reports. The audit committee needs to enforce the systems of proper financial

reporting to ensure accuracy and timeliness of data presented. Suggested reports would

include historical data, budget-to-actual results, and projected cash flows.

Such reports should be discussed with management and management should be

prepared to give an analysis of the historical results and trends and expectations for the

near future for the organization.

3. Pay attention to risk assessment and risk management

Theft and misreporting represent fraud and can do irreparable harm to the organization.

In today’s climate, trust does not go far enough to protect an organization from
 accusation or legal action. Internal controls that segregate duties or provide supervisory

checks are a must.

The audit committee should see that management is committed to improving internal

controls and financial accounting and reporting processes. The audit committee must

influence the “tone at the top” and ensure that that tone is to promptly and completely

address any deficiency in internal controls and reporting. The audit committee should

establish specific procedures for handling complaints received concerning finance,

accounting, internal accounting controls and audit matters.

Audit committees need to be vigorous in the fulfillment of their responsibilities in order to

effectuate proactive oversight. Strong oversight will help to protect the organization and ensure

its sustainability and the success of its important mission within the nonprofit sector.

Bill Taylor
Weston County Extension Office

The University of Wyoming is an equal opportunity/affirmative action institution.