Executive Summary: Here's an Example
By Les Wallace, PhD
Acme Board Finance Committe Proposal for Standing Audit/ERM Committee
Recommendation: Priority is urgent. The Acme Board Finance Committee recommends the creation of a standing board audit / ERM committee to oversee independent assessments of organizational finance and other areas of risk assessment. [Task force members, D. Smith, R. Aragon, F. Lagano]. The Committee further recommended that this committee be composed of three current board members, a past president and an outside financial expert (five total members).
Context: In 2002, federal legislation known as “the Corporate and Auditing Accountability and Responsibility Act,” (Sarbanes-Oxley Act) required corporations to be held to a higher standard of transparency and risk assessment. Governing bodies created audit committees independent of board financial committees or staff finance staff to comply with the intent of the law. This movement to independent risk assessment has permeated the not-for-profit sector and such audit committees are now commonplace.
This gives us the opportunity to create an “Audit / ERM Committee” to facilitate an independent external audit of the organization’s financial health and practices, assure and support board follow through on any “exceptions” from standard accounting principles or financial transactions identified by the audit, and investigate any other organizational risk or whistleblower issues they deem important for broader ERM / enterprise risk management (e.g. emergency business resumption, security, insurance coverage, IT, privacy).
The audit committee is typically separate from the finance committee with no overlapping members, and with the committee majority being board members. It is not unusual for an audit committee to have an outside voting or non-voting member with a financial background.
Evidence/Data: Creation of this committee is deemed “urgent” due to recent findings of lapses by the new acting CFO in timely financial accounting and reconciliation. To date, no unethical or fraudulent behavior has come to light, howeverthe findings show that past audits called attention to exceptions in financial management without follow up by the board. BoardSource, the pre-eminent recognized source for best governance practices in the not-for-profit world strongly recommends creation of audit committees as a standard of high performance governance. [“The Sarbanes-Oxley Act and Implications for Nonprofit Organizations” BoardSource 2006]
Financial/Staffing: the Board currently budgets for an external financial audit so no additional budget impact is anticipated for this line item.
Because audit committees are quickly evolving into full “enterprise risk management” committees and expanding their purview to a broader range of organization risks an “internal auditor” position to conduct these additional risk management assessments is anticipated within three years. Salary +/- $60,000 + benefits.
Financial: an outside financial expert for the committee (separate from the “auditing” firm) may involve some professional fees if volunteers cannot be recruited (est. $10,000/yr).
Volunteer Investment: board member committee service, association member service, past president service.
Support Materials: see attached recommended “Audit/ERM Committee Charter.” [Not attached in this web sample]