Principle 21

A charitable organization must keep complete, current, and accurate financial records and ensure strong financial controls are in place. Its board should receive and review timely reports of the organization’s financial activities and should have a qualified, independent financial expert audit or review these statements annually in a manner appropriate to the organization’s size and scale of operations.

Complete and accurate financial statements are essential for a charitable organization to fulfill its legal responsibilities and for its board of directors to exercise appropriate oversight of the organization’s financial resources. A board that does not have members with financial expertise should retain a qualified paid or volunteer accounting professional to establish whether financial systems and reports are organized and implemented appropriately.

Having financial statements prepared and audited in accordance with generally accepted accounting principles and auditing standards improves the quality of the information and provides external input on the strength of financial controls that help prevent mismanagement or fraud. Each organization must ensure that it has its annual financial statements audited or reviewed as required by law in the states in which it operates or raises funds or as required by government or private funders. When an audit is not legally required, a financial review offers a less expensive option that still provides the board, regulators, and the public with some assurance of the accuracy of the organization’s financial records. Many smaller organizations that have opted to work with an independent accountant have noted that the accountant provided invaluable guidance. The IRS Form 990 asks organizations to report whether their financial statements were compiled, reviewed, or audited by an independent accountant, and whether they have an audit committee to oversee the audit process and select an independent auditor. Every charitable organization that has its financial statements independently audited, whether or not it is legally required to do so, should consider establishing an audit committee composed of independent board members with appropriate financial expertise. The audit committee should meet directly with the auditors in executive session, unfiltered by the organization’s paid staff, thereby reducing possible conflicts of interest and providing the board greater assurance that the audit has been conducted appropriately. If state law permits, the board may appoint non-voting, non-staff advisors rather than board members to the audit committee, or invite a financial expert to serve in an advisory non-voting basis.

Organizations with small boards of directors or limited organizational structures may choose not to delegate the audit responsibility to a separate committee and instead have the full board handle audit related issues. Audit committees may also be inappropriate for charitable organizations that are organized as trusts rather than as corporations.