Recently, a California Nonprofitemployee was caught stealing over$500,000 in funds from her employer.The Ventura Country Star reported thatthe employee directly stole the charity’scash, used her access to the expenseaccount to make purchases for herselfin addition to falsifying the charity’saccounting ledgers and documents.
Unfortunately, this scenario is all too common. In recent years,several companies have found themselves on newspaper frontpages for illegal business activities. In response to these events,organizations are recognizing the tremendous value an auditcommittee is to their company. These committees serve to ensurethat all financial dealings are legal and ethical, and assure thatthere is no fraudulent behavior within the company.
Businesses have also responded to the regulations set forth bythe Sarbanes-Oxley Act of 2002. The Act outlines standardsregarding financial dealings and auditing procedures withinpublicly traded companies. Several provisions apply tononprofits, which instruct organizations to establish concreteauditing procedures. It provides explicit provisions for electingaudit committee members, protections for whistle-blowers andregulations regarding the destruction of documents.
As a result of notable scandals, nonprofits must remain educatedconcerning the design and responsibilities of an audit committeeto ensure that their organization remains financially strong andresponsible.
Audit Committee Members
According to the Sarbanes-Oxley Act, a company’s audit committee must be comprised of members of the Board of Directors who are also considered “independent.” This means that committee members must not receive compensation for their services on the audit committee or within the organization in another function, except if they are paid as a Board of Directors member. Generally, though, members of the board are volunteers and do not receive compensation.
The committee must also contain one designated finance“expert” who interfaces with the auditor. This person must havethe knowledge and ability to analyze financial documents. Theother members should also be financially competent enough tomake sound financial decisions. Specifically, they should be ableto select a credible auditing firm and understand the audit dataonce it is completed.
Nonprofits conduct audits through an outside professional, with that auditor’s purpose being to discover any fraudulent activities within the organization. The auditing committee will then work with the auditor and the Board of Directors to identify financial red flags and ensure that all aspects of the organization are operating legally.
In addition, the auditing committee supervises the organization’s management and oversees the finance reporting procedures, including:
- Selects the outside auditor without management input to ensure there is no conflict of interest.
- Works with the auditor to regulate the organization’s finances on a regular basis and especially at the end of the fiscal year.
- Establishes a level of openness within the organization, and encourages employees and board members to speak up about any fraudulent activity.
- Monitors the organization’s operations and risk management controls.
- Ensures that all financial reporting within the organization complies with federal and state regulations, and follows the doctrines established by the Board of Directors.
There are several insurance options available to combat losses in the event of fraudulent activity. These coverage options, along with an audit committee, can add financial security to a nonprofit organization:
- Employee Dishonesty Coverage: Protects the organization in the event of fraudulent activity of one or more employees including loss of funds, property and securities.
- Fiduciary Dishonesty Coverage: Covers the loss of assets from an ERISA plan in the event of theft or larceny by an employee of an organization.
- Fiduciary Liability: Protects employee welfare and pension plans, the organization itself and the individual fiduciaries of the plans.
Covers any liability from violations of responsibility, obligation or duties imposed upon the fiduciaries by ERISA.
Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.