Increased attention and scrutiny from the public, government agencies, and financial institutions have placed a greater emphasis on accountability, transparency, and risk management for colleges and universities and their foundations. One of the first steps to addressing this increased scrutiny is by developing a strong audit committee as part of your board of directors.
Audit committees can contribute through facilitating:
- Accurate and timely financial reporting
- Strong internal control environment
- Compliance with laws and regulations
- Management of operating risks
According to a 2011 Association of Governing Boards of Universities and Colleges (AGB) Survey of Higher Education Governance, 65% of the boards of independent institutions and 45% of public institutions had a separate audit committee. A 2010 AGB survey found 70% of college and university foundations had a separate audit committee. The industry has obviously recognized the need for the committee and in this newsletter we will discuss the committee’s purpose and responsibilities, who should be a member of a strong audit committee, and some best practices for effective audit committees.
Purpose and Responsibilities
The audit committee’s purpose is to provide oversight of the institution’s financial practices and standards of conduct. In the execution of this purpose, the committee has the following responsibilities:
- Understand and provide oversight of accounting practices and the financial reporting process
- The committees of private institutions must be aware of Financial Accounting Standards Board (FASB) regulations
- Public institutions’ committees must be cognizant of Governmental Accounting Standards Board (GASB) standards
- Oversee the internal audit function
- Review the internal audit plan on an annual basis
- Internal auditor should report their findings directly to the board
- Selection and oversight of the external auditor
- Review the performance of the external auditor
- Ensure the independence of the external auditor
- Review the financial statements
- Review should include “management discussion and analysis”
- Compare results with prior years
- Analyze revenue and expense trends
- Risk management
- Understand the risks (operational, strategic, financial, compliance, and reputational) facing the institution
- Assess whether those risks will prevent the institution from fulfilling its strategic objectives
- Analyze the institution’s recognition of and reporting required under federal, state and local laws as well as contractual compliance
The depth and breadth of this list is further evidence of the need for a separate audit committee as part of the board of directors. The board as a whole simply would not have the resources to adequately carry out these responsibilities, whereas the smaller audit committee is dedicated to these six main objectives.
Composition and Structure
According to the Association of Governing Boards of Universities and Colleges (AGB), an audit committee generally has three to six members, but the exact number is dictated by the size of the organization. These members should serve staggered, multi-year terms (often three years) to promote continuity. Each member should have a general understanding of business and finance and be knowledgeable about key compliance issues and risks facing the institution. All members should also be independent of the institution. The institutions financial management team may attend meetings, but their role should be limited to that of a staff or support role. Ideally, the committee should include at least one member that is considered a financial expert. A financial expert should possess the following attributes:
- Understand financial statements and accounting principles
- Ability to apply these principles in relation to the review of accounting estimates, reserves, and accruals
- Experience in the preparation and review of the financial statements
- Understand internal controls and audit committee functions
Below is a list of audit committee best practices as outlined by the AGB:
- Meet two to four times annually
- Meet with the president, CFO, and internal auditor annually
- Remain current with emerging accounting principles and practices
- Review president’s expenses
- Ensure management takes responsibility for the financial statements
- Report to the board the following:
- Technical issues uncovered
- Legal environment, including any pending lawsuits
- Compliance with regulations and contracts
- Tax law changes that would affect the institution
Top Questions for the External Auditor, According to the AGB
- How does the institution’s financial health compare to last year?
- Did the auditor issue an “unmodified” opinion?
- Were any internal control issues identified?
- Were there any significant changes in accounting policies for this audit?
- How comfortable is the auditor with management’s estimates?
- Is there any evidence of fraud at the institution?
- Were there any findings issued under a management letter?
- Has any other auditing work been performed for the institution during the current year?
- Are there any issues with management which the committee should be made aware?
Article written by Tom Smither, Supervisor of Assurance Services
Staisloff, Richard. “The Audit Committee”. AGB Effective Committee Series. 2011