Trustees are responsible for financial oversight but may delegate some aspects to committees. I am often asked if a charity should have a separate audit committee in addition to a finance committee.
The focus for an audit committee is risk and risk management, rather than finance. Managing risk is the responsibility of managers, so the audit committee’s role is oversight. Typically, managers identify the risks, assess them and consider mitigating actions, culminating in a risk register. In smaller organisations, trustees might need to do some of these tasks. The board needs to review the risk register, but the audit committee will oversee its preparation and ensure it reflects the most important risks. The audit committee is responsible for ensuring risk is managed effectively across the whole organisation.
Audit committees look for assurance that the organisation is following good processes for managing key risks and making decisions. Taking care not to interfere in areas that managers are responsible for, the audit committee should scrutinise decisions and how they were made.
In larger charities, the committee will oversee the internal audit function, ensuring that an appropriate programme of activities is undertaken to help the organisation manage its key risks. The audit committee also receives the report of the external auditor, reviewing its appointment and performance.
Finance committees focus on the financial performance of the charity. This starts with the process of planning its finances. The committee should ensure timely budgeting occurs with an appropriate degree of involvement from other functions. The committee will scrutinise the draft budget, validating the assumptions underpinning it.
The finance committee establishes an appropriate financial reporting mechanism, looking at the frequency of reports, their format for different audiences and their content. Timing of meetings should allow for the preparation and distribution of reports so they can be scrutinised. The
finance committee scrutinises reports to monitor performance against the plan.
The finance committee also has responsibility for ensuring the organisation has relevant finance policies. It should scrutinise important financial strategies such as the reserves policy. Other aspects of financial strategy are also within its remit, such as pricing and new business.
Smaller charities will typically have one committee for finance and audit. In practice, they do not take on the whole audit committee role but have responsibility for the appointment of external auditors and receive their reports. Other functions of the audit committee, such as risk management, are usually handled by the full board.
The board needs to ensure that a finance committee with a broader remit does not become a shadow board, with decisions made in the committee when they should be brought before the whole board.
Kate Sayer is senior consultant at specialist auditors Sayer Vincent