NONPROFIT AUDITS: Are they Necessary?

I recently wrote a blog about the susceptibility of fraud in small businesses. After reading an MSN article this morning, I realized how frequently fraud affects nonprofits as well.

The severity of the fraud committed can be something as straightforward as an employee charging personal travel to a company credit card. It could also be something much more severe like deliberate falsification of financial statements. In the case of the MSN article I read, it was more in line with the latter. The President of the organization in question commissioned a $45,000 wax figure of herself - and had the organization foot the bill! Unfortunately, not all fraud is this obvious or easy to detect. What can management of a nonprofit do to protect the entity and its assets? Engage a CPA to provide an audit of your financial statements.

CPAs who conduct audits have always been required to have a thorough understanding of the entity’s activities. Now, auditors must also perform rigorous internal control testing to ensure that management has systems in place to prevent and detect fraud. One example of internal controls that CPAs look for is proper segregation of duties. This means that the auditor must confirm that there are separate individuals responsible for approving disbursements, receiving and distributing funds, receiving bank statements, and performing bank reconciliations.

Too often, we hear organizations discussing audits in terms of the cost of the audit. However, these organizations are ignoring the long-term benefits to being able to present audited financial statements. Having an audit of an organization’s financial statements decreases the potential for fraud. An audit will also ensure that the financial statements are accurately presented. This in turn leads to greater public trust....which can lead to improved donations and more grant money for the organization.

Nonprofit entities should be aware of the possibility of internal fraud and take the time to understand how an audit can help prevent or detect fraud. For a more detailed explanation on how having a CPA audit your financials can benefit your organization, please contact our offices.

--LeAnn Carlson