QUESTION: Can a charitable organization subject to the Nonprofit Integrity Act’s requirement of an audit committee include on such committee its CEO or CFO?
ANSWER: It depends (sorry about this standard lawyer’s response, but read on). California Government Code section 12586(e)(2) provides that “the member or members of the audit committee shall not include any members of the staff, including the president or chief executive officer and the treasurer or chief financial officer.” The California Attorney General’s website asserts that “staff” refers only to employees of the corporation and not to members of the board of directors. “Thus the term ‘staff’ includes any employees (or independent contractors) of the corporation, whether paid or not, who have the duties of president, CEO, treasurer or CFO, but does not include directors of the corporation, acting solely in their capacity as directors or officers of the board of directors. It does not include the president, CEO, treasurer or CFO to the extent that those persons are acting merely as officers of the board of directors rather than as members of the staff.”
Read carefully, the AG’s response does not appear to give a clear cut answer. How exactly can one differentiate between a President (or CEO, treasurer or CFO) acting merely as an officer of the board rather than as an unpaid staff member? The AG does not state that by virtue of being a board member, it is clear that such individual is acting merely as an officer of the board. Would a very active President who spends a large number of hours towards leading the organization be acting as a member of the staff?
It would be prudent to remember the rationale behind having an audit committee for guidance on such issues. For example, if the President had direct responsibility for the organization’s financial transactions, he or she should probably be excluded from the audit committee and its review of the implementation of internal financial controls. Where you are uncertain, the safe course may be to exclude such person, but I encourage you to contact an exempt organizations attorney or the AG’s office for guidance based on your facts and circumstances.
Effective Audit Committees for Nonprofit Organizations (BDO) – download available here