An independent Audit Committee is the third principle outlined by the American Bar Association (ABA) in considering the corporate governance implications that arise from Sarbanes-Oxley reforms.

 

The ABA offers that organizations with significant financial resources "should have an audit committee composed solely of independent directors...that reviews the organization's critical accounting policies and decisions and the adequacy of its internal control systems as well as oversee the accuracy of its financial statements and reports."

 

We can easily debate the need for more independent directors and I have attempted to begin that conversation in the review of the ABA's 2nd principle (have independent directors).  Generally, everyone who is a nonprofit board member, save those few ED’s who are also Presidents and thus also board members, are independent meaning, they have no personal financial stake or gain in the efforts of the nonprofit which they govern.  And, we can easily ensure there is no stake for the staff persons with board seats by being exclusive about the votes in which they can participate.

 

So, I believe one big question Sarbanes-Oxley asks for nonprofits is how many financial resources are “significant” to warrant an audit committee?  Well, lets say that $10 million plus begins the significant, really resourced size level (although there are way bigger and way smaller nonprofits).   My thought: I don't worry as much about the really resourced nonprofits as I do the less resourced nonprofits.  In reality, the resources nonprofits likely have funding sources and external certification bodies and regulatory bodies that all have eyes that watch over the shoulders of the nonprofit.  Yes, there are exceptions where an exec or a treasurer or someone with some access to the books and till, finds a way to take.  But my bet is that this doesn't go on for that long and the board figures it out pretty quickly thanks to their auditor and other checks and balances that are in place precisely because they are so resourced.  And yes, I know, the big for profits have had many of these same systems in place and look where they are to day.

 

Just the same, the big nonprofits, paralleling the number of rich proportionate to the poor and middle class, are in number, relatively few compared to the total number of nonprofits.  More importantly then, it is the medium and small number of nonprofits, the less regulated or fewer likely to be members who have to pledge and get audited to behave certain “right” ways.  And, to top it off, it is these medium and small nonprofits who are likely to have not reached the age of maturity or more importantly, not moved founder execs on to another place so that bad things are actually more possible.  Just look around at the size of nonprofits whose exec has done a number of the bad things the audit committee is specifically set up to catch.

 

I for one believe that an independent Audit Committee, not just a finance committee focused on budget and the status of income and expenses, but an Audit Committee focused on systems, processes, policy and compliance is not just helpful but essential for the nonprofit who doesn't have the resources or obligations that can keep it out of difficulty.   What the heck, it’s not even that hard and only needs to work a couple of months a year.  What could be better?