Notes from the Audit Clinic; Your Audit isn’t Fraud Protection

 Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)

Nonprofit audit season’s heating up, and so is the audit clinic.  Let’s see what’s going on in the audit clinic today… 

Nonprofit (NP):  “Our auditor says we need to add more internal controls to prevent fraud.  Isn’t our audit enough to catch fraud?”

Audit Clinic (Clinic):  “That’s a really good question.  You do need to safeguard your assets with fraud prevention controls, but your audit is not one of your controls.

NP:  “So why do we go through an audit?  They’re at the office for days and I can’t get anything else done.”

Clinic:  “External audits find less than four of every 100 frauds detected.*  The audit is to determine that your financial statements are materially correct, that they’re prepared using generally accepted accounting principles including all the required disclosures.” 

NP:  “So where do controls come in?”

Clinic:  “The auditors will tell you if they see gaps in your controls that could allow fraud to happen, and you should try to fill those gaps whenever you can.  More than two of every three fraud victims either lacked internal controls, had an override of internal controls or lacked management review.*”    

NP:  “They’re going to have to realize that we’re a small organization.  We won’t be able to control every risk.”

Clinic:  “Well, the auditors aren’t the accounting police.  They have to report a control weakness, but it’s up to your Board to consider whether implementing a control is worth the effort.  After all, safeguarding your assets is the Board’s responsibility.”

NP:  “What controls are worth the effort?”

Clinic:  “Every organization is different, but on average, the controls that reduce nonprofit fraud the most are management review, data monitoring and analysis, and a tip hotline.  In fact, tips catch more frauds than anything else*.”      

NP:  “Is there anything in particular that we should look out for?”

Clinic:  “Yes, you could give high priority to addressing the fraud schemes that nonprofits are most likely to face:  fake vendor invoices, check tampering, expense reimbursements and theft of incoming payments.*”

NP:  “Thanks Audit Clinic.  This is all good information.  I’ll let you know how it works out.”  

What can we learn?

Discuss your concerns with your auditors.  If you are concerned that fraud might occur in a particular area of your organization, discuss the issue with your auditors in the pre-audit planning meeting.  They’ll fold your concerns into their audit risk assessment.

Learn more about fraud prevention in our on-demand webinar, Fraud—You just lost $1 million

Learn more about the audit experience in our on-demand webinar, Acing Your Audit—managing your audit from start to finish:  

Get more FIT! TIPS.  Join our 501(c)(fit!) community.

*yes, it’s true, per the Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse 2106 Global Fraud Study. 

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