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Fraud and the non-profit organization

In my career, I have participated on executive boards of nonprofit organizations; audited and consulted on internal controls for nonprofit organizations, and served as finance manager for a nonprofit organization. Nonprofits routinely replace board members and some day you may be asked to serve on the board of a nonprofit organization.

Board members of nonprofit organizations have a fiduciary responsibility to oversee management of the organization. Among other duties, board members hold management accountable for maintaining internal controls over revenue, expenses, capital outlays and investments. To achieve this, effective internal control systems must be in place to both reduce the likelihood of resources being misappropriated and detect financial irregularities in a timely fashion.

Participating on the board of a nonprofit organization differs from serving on the board of a publicly traded company because the nonprofit board member has no personal financial interest in the organization. If a publicly traded company performs poorly, board members have a vested interest in holding management accountable. As a result, management of publicly traded companies will work diligently to maintain efficiency, profitability, and stock value at the risk of losing their jobs.

Since the nonprofit board member has no financial interest at risk in the organization, he or she may not be motivated to thoroughly question management regarding the financial performance of the organization. Board members of smaller nonprofits may not be educated with respect to financial reporting matters and as a consequence may not feel comfortable asking financial questions at board meetings.

If you are currently a board member of a nonprofit organization with limited exposure to financial reporting, how would you know if the organization is at risk for experiencing financial irregularities ? The following conditions are indicators that an organization’s accounting systems may be lacking sufficient internal controls to prevent or detect financial irregularities:

  • Organization is still using a manual bookkeeping system
  • There are numerous bank accounts and transfers between these accounts
  • Financial statement reporting is not timely
  • Financial statements contain obvious errors, such as negative or excessive balances in payroll tax accruals
  • Inquiries regarding financial statement issues seldom are resolved
  • Motions are made to accept financial statements as submitted without any discussion
  • Bank overdraft fees, late fees and/or penalties appear on the profit and loss statements
  • Assessments of internal controls by independent CPA are never performed
  • Financial statements are overly confusing or contains either too much or too little detail
  • Management is quick to make excuses for the condition of the financial reporting system
  • A current accounting procedures manual does not exist
  • One individual in the organization has control over most of the financial reporting functions
  • Accounting staff have little or no formal accounting training
  • The finance manager has authority to sign checks
  • Management owns a company that provides services to the organization

As a nonprofit board member, you have every right to respectfully ask questions of management regarding the condition of the financial reporting system. If you are not sure if any of the aforementioned conditions exist, ask!

Conversely, evidence that the financial reporting systems and internal controls are in place and/or operating properly include:

  • Internally-prepared financial statements are presented in a timely manner
  • Financial statements are provided to board members prior to board meetings early enough to allow adequate time to review and note questions
  • Accounting procedures manual has been adopted
  • Internal financial statements appear to be free from obvious clerical mistakes
  • Requests for additional financial information are provided in a timely manner
  • All bank accounts were reconciled within 30 days of month end
  • All accounting staff have proper training and education
  • Proper segregation of duties exist for all accounting functions
  • Outside CPA attends annual board meeting to discuss pending issues affecting nonprofit organizations, status of tax filings, and provide an independent overview of the financial condition of the nonprofit

If annual audits are required:

  • Audits are completed within 12 months of year end
  • Audit reports are “unqualified”
  • No reportable conditions on internal controls are noted during audits

Nonprofit embezzlement is common but seldom reported for fear of damage to the nonprofit’s reputation and the potential decline in donations.

Remember, only trustworthy employees steal from nonprofits. Unscrupulous individuals never get hired in the first place.

and Certified in Financial Forensics . He works for Southard, Beckham, Atwater and Berry and can be reached at 876-4491 or cmutchler [at] sbabcpa [dot] com.)

(Editor’s Note: Christopher Mutchler is a CPA, Certified Fraud Examiner (CFE)

 
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