Nonprofit Audit Committee Members Must Take Vigorous Actions

Nonprofit Audit Committee Members Must Take Vigorous Actions

By: Eugene Fram

Many nonprofit board members overtly adopt a “nice guy” syndrome. Because of their community or industry connections, they inherently avoid internal or external conflict and consciously sweep red flags under the rug. (Remember Penn State.) Another example: I have read about some nonprofit boards allowing nonprofit executives who stole funds to return the funds without facing criminal charges. One may question whether or not this action prevents others from stealing?

Since NFP and FP board members have the same duties of care and fiduciary responsibilities, I suggest those who serve on nonprofit audit committees carefully review the outcome a FP court case involving an audit committee.

Court records show that two of three audit committee members were found to have liability for failure to take action on several reporting irregularities, “as well as (actions on) other… ‘red flags’ (that) should have prompted further investigation.” Note that the case was brought before the trend setting venue for corporate law, the U.S. District Court for the Southern District of New York.

Necessary Audit Committee Actions

• Any hint of fraud, sexual harassment or other improprieties needs immediate investigation. Proper investigative procedures must be employed, but the committee can’t offhandedly dismiss the implication with the conclusion that, “He/s simply wouldn’t do anything like that.”
• Legal counsel needs to be employed to confirm that the investigative procedures are appropriate and that the rights of the accused are being protected.
• Unless the board chair might be involved, she/h needs to confidentially be apprised of the investigation and how it is being conducted.
• With the board chair, the audit committee needs to make a decision about the point at which the entire board needs to be informed.
• During the investigation, the audit committee will need to meet frequently and to have minutes of the meeting carefully developed. (Note, in the case cited, “…neither the board of directors nor audit committee reported having had any meetings.”)
• Concern for organizational reputation will be rampant, but the audit committee has to verify all facts and be certain that none are being swept under the rug.

Deloitte Director’s Series: Beyond Compliance Reminds Audit Committee To Take These Supplementary Actions:

Growing accounting complexity does not need to automatically result in more complex financial reporting.
Audit Committees should understanding what is important to their stakeholders to ensure the information disclosed to stakeholders is relevant and useful.
Together with the full board…, audit committees should ensure that the organization maintains appropriate mechanisms to protect its brand and reputation.
“Tone at the Top” is also important since employees model their behavior on that of management. Management must, therefore, act with integrity and make it clearer that that there will be zero tolerance for improper behavior by anyone in any position.

Nonprofit boards are facing increasing potential liabilities through more legislative and legal compliance regulations. Nonprofit board members frequently want to avoid internal and external conflict. Do they perhaps feel that they have enough in their own work environments along with fearing for the organization’s reputation? Also, they don’t want conflict in the nonprofit environment where they are trying to do something positive. But, as shown above, audit committees everywhere need to become more vigorously proactive. The “nice guy” syndrome has no place in the culture of a nonprofit audit committee.


Appreciation: Dr. Richard Leblanc, York University’s Associate Professor, Law, Governance & Ethics, called my attention to this new case, and pointed to the concurrent character of audit committee duties in both NFP and FP environments.

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