In today’s complex and highly scrutinized environment, your nonprofit operates under more watchful eyes than ever before. Donors, regulators, and the communities you serve all expect transparency and accountability in how you manage funds. At the center of these expectations lies one of the most important—but often underutilized—pillars of nonprofit governance: the audit committee.
Your audit committee plays a critical role in protecting your organization’s financial health, reputation, and credibility. When structured and managed effectively, it not only ensures compliance but also enhances confidence in your nonprofit’s mission. Whether your organization is small and growing or well-established with multiple funding streams, an empowered audit committee can help you maintain ethical oversight and build a foundation for long-term sustainability.
This article will help you understand how your audit committee should operate—covering its core responsibilities, structure, and best practices—so you can ensure your organization’s governance remains strong and transparent.
Understanding the Core Purpose of the Audit Committee
At its heart, your audit committee exists to provide independent oversight of your nonprofit’s financial reporting, risk management, and internal control systems. Unlike management, which is responsible for day-to-day operations, your audit committee takes a step back to view the organization objectively.
By functioning as an independent body, your audit committee bridges the gap between your management team, your auditors, and your board of directors. The committee reviews major financial policies, monitors risks, and assesses the effectiveness of internal controls that keep your nonprofit compliant with laws and accounting standards.
A well-functioning committee doesn’t just identify problems—it helps prevent them. When weaknesses or deficiencies are spotted, the committee works with management to address them promptly. This proactive approach safeguards your nonprofit’s reputation and strengthens donor confidence.
Your audit committee also serves an educational role. By promoting financial literacy among your board members, it helps them understand the broader implications of audit results and financial decisions. That awareness translates into better governance and more informed decision-making across your organization.
In short, your audit committee is more than a compliance body. It’s a vital part of your governance framework.
Structuring an Effective Audit Committee
The effectiveness of your audit committee begins with its structure. The composition, independence, and expertise of its members directly influence how well it can perform.
1. Select the Right Members
An ideal audit committee combines financial literacy, governance experience, and a strong understanding of nonprofit operations. At least one member should be a financial expert—someone with experience in accounting, auditing, or financial management—who can interpret complex reports and help guide discussions.
When possible, look for members who bring different perspectives to the table. A mix of backgrounds—such as legal, operational, or programmatic experience—adds depth to the committee’s review process.
2. Maintain Independence
Independence is the cornerstone of effective oversight. Members should not be involved in daily management or operational decision-making. This ensures that your committee can evaluate financial matters objectively, free from internal bias or conflicts of interest.
Some nonprofits find it valuable to include an external or community member on their audit committee. An independent voice outside the board can bring additional objectivity and credibility to the review process.
3. Keep the Committee the Right Size
While there’s no one-size-fits-all rule, most nonprofits function best with three to five audit committee members. A smaller committee may lack diversity of thought, while a larger one can become inefficient or lose accountability.
4. Define Clear Roles and Responsibilities
Establishing a written audit committee charter is one of the most effective ways to clarify expectations. The charter should outline responsibilities, authority, membership requirements, and procedures for self-evaluation. It should also detail how often the committee meets, how it communicates with management and auditors, and how it reports to the board.
The committee chair plays a pivotal role in guiding discussions, setting agendas, and maintaining communication between stakeholders. A well-prepared chair helps ensure meetings are focused and action-oriented.
When your committee has the right structure, it becomes a trusted governance partner that supports—not duplicates—management’s work.
Key Responsibilities of the Audit Committee
Your audit committee’s responsibilities go far beyond reviewing financial statements once a year. They encompass the broader oversight of financial integrity, compliance, and risk.
Here’s what your committee should be focusing on:
1. Overseeing Financial Reporting
Your audit committee is responsible for ensuring that financial reports are transparent, accurate and presented according to applicable accounting standards. This includes reviewing audited financial statements, assessing key accounting policies, and confirming that management’s financial disclosures are transparent and reliable.
2. Managing the Auditor Relationship
Your committee typically selects the external audit firm, reviews the scope of the audit, and discusses results with both the auditors and management. Maintaining independence in this process ensures the audit remains objective and credible.
The committee should also review the auditor’s findings carefully, evaluate management’s responses, and follow up on any significant issues identified during the audit.
3. Monitoring Internal Controls
Internal controls are your nonprofit’s defense against errors and misuse of funds. Your audit committee should regularly evaluate how well these systems work and ensure that corrective actions are taken when weaknesses are found.
4. Ensuring Compliance and Ethics
Your committee also helps oversee compliance with donor restrictions, grant requirements, and legal obligations. Many committees are responsible for reviewing whistleblower and conflict-of-interest policies as well—critical tools for maintaining an ethical culture.
Strengthening Risk Management and Internal Controls
Risk management is not about avoiding risk—it’s about understanding it and preparing for it. In the nonprofit world, where resources are limited and funding sources can shift quickly, this is essential.
Your audit committee should regularly assess your organization’s exposure to financial, operational, and compliance risks. That means examining potential vulnerabilities such as fraud, cybersecurity threats, grant dependency, and regulatory changes.
By maintaining open communication with management, your committee ensures that mitigation strategies are realistic and consistently applied. You want your organization to be proactive, not reactive, when it comes to risk.
Internal controls form the foundation of that proactive approach. Your audit committee should verify that systems—like expense approvals, segregation of duties, and recordkeeping—are functioning properly. Conducting internal reviews or engaging independent auditors to test these controls can provide valuable insight.
When risk management becomes part of your culture, it creates a sense of shared accountability. Your staff, board, and committee members begin to think ahead and take ownership of financial stewardship. That mindset is what helps a nonprofit not just survive, but thrive.
Collaborating Effectively with Auditors
Strong collaboration with both external and internal auditors is key to maintaining transparency. Your audit committee serves as the link between auditors, management, and the board.
When working with external auditors, your committee should:
- Take an active role in selecting the audit firm.
- Approve the scope and terms of engagement.
- Review findings and ensure follow-up actions are taken.
- Meet privately with auditors (without management present) to discuss sensitive matters or potential risks.
If your organization has internal auditors, your committee should oversee their work throughout the year. That includes approving annual audit plans, reviewing reports, and ensuring identified risks are addressed.
Best Practices for a High-Performing Audit Committee
The difference between an average audit committee and an exceptional one lies in its mindset. A high-performing committee goes beyond compliance—it acts as a strategic asset.
Here are several best practices that can elevate your committee’s impact:
- Prioritize ongoing education. Stay informed about evolving nonprofit regulations, accounting standards, and risks such as cybersecurity and data privacy. The more informed your members are, the more effective your oversight becomes.
- Conduct annual self-assessments. Review individual performance to help identify skill gaps and strengthen effectiveness year over year.
- Follow a structured work plan. Align the committee’s meeting schedule and review activities with the nonprofit’s fiscal calendar to maintain consistent oversight.
- Embrace transparency and communication. Report clearly to the board of directors and maintain detailed documentation of meetings and decisions.
- Promote a culture of openness. Create a safe space where staff and volunteers can raise concerns without fear of reprisal.
- Use technology wisely. Secure digital tools that can simplify audit tracking, document storage, and collaboration, making the committee’s work more efficient and organized.
Partnering with MKS&H for Stronger Nonprofit Governance
Your audit committee is one of your nonprofit’s greatest assets. It upholds your integrity, reinforces accountability, and provides assurance that your organization’s financial practices align with your mission and values. But building and maintaining an effective audit committee takes time, structure, and expertise.
MKS&H is ready to help! With decades of experience in accounting, auditing, and nonprofit consulting, our CPAs are highly effective at helping organizations like yours strengthen their governance and financial transparency. Our team understands the nuances of nonprofit operations and offers practical solutions tailored to your unique challenges.
When you partner with MKS&H, you’re not just checking a compliance box—you’re building a culture of accountability and financial stewardship that inspires confidence across your organization. Contact our office today to learn how we can help your nonprofit elevate its audit committee and achieve sustainable success.
