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Not-For-Profit Audit Committee: Best Practices

By Tom Watson on January 20, 2006No Comment
MoneyNot-For-Profit Audit Committee: Best Practices

In the past five years, the business world has seen a large number of shocking accounting scandals at Fortune 500 companies. Many of these businesses were previously thought of as pillars of the corporate community. These scandals have resulted in fines, jail time, and increased inspection by the government. These scandals have also created an environment of suspicion across the corporate world. Not-for-profit companies have even begun to feel the wave of scrutiny that has overwhelmed American business. However, unlike for-profit companies, whose audit committees operate under strict guidance from the government, there has been very little direction given to not-for-profit audit committees. Warren Ruppel addresses this void in non-profit oversight with Not-For-Profit Audit Committee: Best Practices.

For the first time, not-for-profit audit committees have a standard by which to measure their structure, procedures, relationships, and all other functions and responsibilities. Mr. Ruppel puts to rest the uncertainty in not-for-profit auditing by conducting a detailed explanation of the best practices of non-profit audit committees. Following these procedures will ensure that accounting and reporting abuses are caught and addressed.

The book opens with a crucial explanation of what characteristics separate not-for-profit organizations from for-profit companies, and why simply mimicking a for-profit audit committee will not result in the best practices for a not-for-profit. Understanding the environment in which not-for-profit organizations operate is vital for new members to a not-for-profit audit committee.

The next critical best practice is simply establishing the rules for the operation of the audit committee. Mr. Ruppel recommends establishing as broad a charter as possible, so that the audit committee can tailor the specific bylaws which govern the committee to the areas which it believes are important. Details such as the number of meetings each year and the experience and affiliations of the members of the committee must be drafted into the bylaws.

For boards establishing their first audit committee, one of the most crucial steps is ensuring that each of the members knows their responsibilities. In particular, committee members must have an understanding of financial procedures that goes beyond simply knowing how accounting transactions are processed. At least one audit committee member must be an expert in financial auditing, and while auditing novices can be useful, some knowledge of accounting and financial procedures is necessary for each member.

The reason that advanced financial knowledge is important is because of the central goal of the committee, to discover and avoid fraud. In order to expose fraud it is critical that each member be aware of the signs that often point to fraud. Knowing and understanding these factors, which may indicate fraud is taking place, can be one of the most useful tools in discovering an illegal activity.

Another critical tool in preventing fraud is establishing a whistleblower program. The program must ensure that employees who come forward with all legitimate complaints regarding inappropriate activities are heard by company management. This structure must guarantee that not only are these grievances given the proper attention by management, but also that the employee will be protected from any retribution or retaliation. It is a core function of an audit committee to establish the whistleblower program procedures outlined by Mr. Ruppel in Chapter 6.

Finally, the book discusses an audit committee action plan. For new committees these outlines, which contain questions and processes, will be fundamental. The book outlines the procedures for the four main audit committee meetings: An organizational meeting; a review of the audit plan with an independent auditor; a review of the audit results; and a review of the independent auditor’s management letter.

For the first time, avoiding fraud and inappropriate activities is foremost on the minds of many not-for-profit board members and executives. Mr. Ruppel’s directions will be an invaluable guide for first time audit committee members and non-profit executives alike.

To learn more, click on the Wiley link below:

Not-for-Profit Audit Committee Best Practices
Warren Ruppel
ISBN: 0-471-69741-9
176 pages
November 2005

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