“Does our organization need a Finance and an Audit Committee, or can the same individuals perform both roles?”

As an accounting professional serving the charitable and nonprofit sector, I’m asked this question quite often:  Here’s the answer I always give – to be most effective, your organization needs separate committees.  Simply put, their roles really are quite different.

What a Finance Committee does

The focus of a Finance Committee is on providing oversight and validating management’s decisions made towards three main purposes:

• The efficient allocation of funds, including reviewing budgets, actual results, fulfillment of donor and grant requirements, and reviewing the quality of the financial reporting system;
• Ensuring the organization has enough cash to fulfill its goals by reviewing cash flow projections, ensuring proper investing activities, and seeking borrowing, if needed; and
• Addressing the overall financial risk accepted by the organization, a task that includes setting, reviewing, and approving financial and accounting policies, commitments and contingencies, and the internal control system, including the processes in place to address fraud.

What an Audit Committee does

The Finance Committee has an internal focus, providing management with a support system. In contrast, the role of the Audit Committee is to challenge the work of management and the Finance Committee, as well as oversee the work of the external auditors. 

The Audit Committee’s overarching purpose is to look after the interests of external stakeholders. For example, is the organization acting in the best interest of the donors or funders? Are contributions well-managed, safeguarded, and used to fulfill intended purposes? Is the external audit process robust and of good quality? The Audit Committee has an external focus on the following areas:

Avoid self-monitoring

Now, having considered their respective roles, consider this – come audit time, could the members of the Finance Committee (with an internal focus), reasonably be expected to objectively challenge their own decisions, while playing the role of the Audit Committee (who should have an external focus)?

When resources are tight (and yes, finding the right talent to sit on two different committees is a challenge), it’s tempting to think that a combined committee can sufficiently perform dual roles, particularly when the roles call for a similar skill set. However, the roles inherently conflict. And therein lies the problem.

If we ask committee members to play conflicting roles, are stakeholders really well served? Ultimately, that’s the question your organization needs to ask. The facts may persuade you – two really are better than one.

All factors considered, whether your organization decides to maintain a combined committee or is convinced that each role needs objectivity to be played well, in the end, the quality of any committee is determined by the quality of its members.  Quality members are independent, financially literate, and experienced with the operating purposes of the organization.  But above all, committee members must have the courage, discipline and personal authority to ask the tough questions. 

Ninette Bishay, CPA, CA, is a senior manager in Grant Thornton LLP’s Charities & Not-for-Profit Sector Group in Toronto, Canada. Contact her by email.