Audits: Not What You Might Think
You may not be doing enough to cover yourself from fraud. Some tips to better audit your nonprofit.
You may not be doing enough to cover yourself from fraud. Some tips to better audit your nonprofit.
After a Washington Post investigation 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.
(Bertlmann/Getty Images)
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