Audits: Not What You Might Think

You may not be doing enough to cover yourself from fraud. Some tips to better audit your nonprofit.

After a Washington Post investigation  (opens in a new tab) uncovered more than 1,000 cases of “diversions of funds” at nonprofits, reporter Joe Stephens noted during a panel discussion that “many of these organizations got clean audits year after year.”

Michael Wyland, CSL, a consultant at Sumption & Wyland, says many association executives and boards have a false sense of security about their annual financial audits. “If you talk to most accountants, they will tell you that a financial audit is not designed to discover fraud,” he says. “An audit is a test of the accounting procedures used in an organization, and it samples transactions and tests whether those transactions are in compliance with generally accepted accounting principles.”

Because a routine audit tests a sample of transactions, when it does uncover fraud, it’s “almost by accident,” Wyland says. A “forensic audit,” on the other hand, will dig up the details of an embezzlement scheme, but it’s far from routine. Costing perhaps 10 times as much as a standard audit, a forensic audit is typically called for only after indications of fraud have arisen.

Experts recommend a few options to better monitor for embezzlement:

Conduct a fraud risk assessment, in which financial procedures are examined to brainstorm fraud scenarios and identify control gaps.

Increase the volume of transactions sampled in a standard external audit.

Periodically and randomly sample transactions internally to ensure compliance with financial procedures.

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