My  term as Chairman of the Board of a not-for-profit (“NFP”) organization recently expired.   The new Chairman  asked me to serve on the Finance Committee. What are the responsibilities of such a committee, and how should it go about doing its job?

Many commentators claim the most important function of a board member is fund-raising.  While there is no doubt this is a critical activity for any board member, there are two responsibilities that supercede the fund raising function in importance. These  are driven largely by the fiduciary responsibility a board member has under state law. They are:  (a)  electing executive management and monitoring that management and (b) ensuring the organization has an effective system of internal controls in place. Lets take a look at each of these.

The finance committee members as board members are responsible for selecting the executive management of the NFP.  They also hold a special responsibility since the annual budget falls under their purview.  Budgets fulfill many functions, but in this context the most important are making sure the organization is adequately funded, and the performance of management is being properly supervised and monitored.  A good budget makes this objective much easier to accomplish, as financial results can be compared to management’s projections. Running out of funding is disastrous for any organization, but it is a virtual death sentence for an NFP.

Budgets are also useful in determining the compensation of executive management.  Every NFP should consider an incentive plan for management and employees where possible. Bonus objectives can be quantified and placed into the budget, giving the board and its finance committee more objective criteria for granting bonuses and salary increases.

As with all organization wide budgets the starting point is a good revenue forecast. It is the responsibility of the finance committee not to pick at the revenue budget but to make sure the budget is built on sound assumptions.  If the budget calls for revenue growth, can management explain how that growth will be achieved?  Example questions include: Will the organization charge more for services?   Will it provide additional services during the upcoming year?  If so, to whom?

Another responsibility of the finance committee is monitoring the audit process.  Any NFP  receiving government funding or wishing to access funding sources such as Charitynavigator needs to have audited financial statements.  The finance committee  should select the independent auditor and  approve the fee after receiving input from management.   Not only must the  committee make sure there are no scope limitations, in the audit but it should press management  to provide assistance to the audit process. whenever possible.  This is one way of ensuring a proper audit scope, minimization of audit fees, and training the financial staff.

The committee must stay in contact with the independent auditor to ensure the audit process goes smoothly and with as little disruption to the organization as possible. The committee should ask the independent auditor for its recommendations on internal control (“management letter”).  The auditor has a duty to report significant weaknesses in internal control to the board. Obviously, the committee will need to make sure management addresses these potential weaknesses.  Governmental agencies  and private funders will often ask to see the management letter before approving the NFP for additional programs or an extension of the current programs.  The committee needs to have two separate confidential discussions:  one with management concerning the auditor without the auditor being present, and one with the auditor  present and management not.

Sadly, the amount of work a finance committee member must do can be a deterrent to finding good committee members.   Since most NFP boards are volunteer boards, it is even harder to attract qualified members.  However,  finance committee members can take some solace in knowing they are doing necessary and meaningful work advancing the cause of their organization.


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