Know your way: clarifying responsibilities of audit committee members.

• Author: Tate, David W.
• Position: Nonprofita&a

to satisfy their responsibilities and sleep well at night--nonprofit audit committee members need to be knowledgeable about their responsibilities. If you already serve, or are asked to serve on a nonprofit audit committee, do you know your responsibilities?

Committee responsibilities are generally spelled out in the California Nonprofit Integrity Act, the California Corporations Code (the business judgment standard), and, indirectly, in auditing pronouncements independent auditors are required to follow. From there, committee members must use their best judgment and diligence in meeting the requirement.

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The California Nonprofit Integrity Act

The California Nonprofit Integrity Act details the requirements nonprofit entities must meet; one of which is having an audit committee. The audit committee and related provisions apply to specified charitable corporations, unincorporated associations and trustees that receive or accrue in any fiscal year gross revenues of $2 million or more (exclusive of grants from, and contracts for services with, governmental entities for which the government requires an accounting of the funds received).

The Act also requires these nonprofits to have annual financial statements that are in accordance with generally accepted accounting principles and audited by an independent CPA. The California Office of the Attorney General has stated that the audited financial statements and notes to the statements must be released to the public.

Further, the board of directors must appoint the audit committee. Committee members may include people who are not members of the board, but may not include any of the nonprofit's staff members.

The audit committee must be separate from the finance committee, if the nonprofit has one. Members of the finance committee may serve on the audit committee, but the chair of the audit committee may not be a member of the finance committee, and finance committee members must constitute less than half of the audit committee's membership.

The attorney general's office also has stated that there is no set number of members the audit committee must have. In theory, one member may be sufficient. However, in practice, three to five members generally allow for a sufficient variety of input without creating a committee that is too cumbersome.

The Act provides that audit committee members cannot receive any compensation from the charity in excess of the compensation, if any, received by board members, and may not have a material financial interest in any entity doing business...