Independent Audits for Non-Profits – Part 2: Myth Busting

09 Dec Independent Audits for Non-Profits – Part 2: Myth Busting

In the first part of our four-part series on independent audits for non-profits, we examined when they are necessary and why they are a good business practice even when they are not required by law.  An audit serves many purposes, including acting as useful tool for preventing potential wrongdoing. 

Yet contrary to what most people think, an audit does not detect fraud.  In fact, a report published by the Association of Certified Fraud Examiners (ACFE) revealed that only 3% of workplace fraud is detecting during an independent audit.

Why an Independent Audit Cannot Uncover Fraud

An independent auditor works with staff and board members, and must rely on an organization’s own representation of its financial position.  In order to detect fraud, the auditor would have to be able to recognize deception or misinformation in the association’s financial statements.  Given that the average auditor is onsite for just two or three days each year, this would be nearly impossible.

For this reason, auditors do not guarantee that an association is free from fraud.  Instead, a series of checks and tests provide reasonable assurance that the organization financial statements are correct and contain no misrepresentations.

Ways to Combat Association Fraud

There are several proactive steps association can take to prevent and detect employee fraud and embezzlement.

• Education is the key to preventing fraud.  One effective strategy for raising awareness within your association is to have officers meet with a bank representative, insurance carrier, or even a member of law enforcement to discuss ways that fraud can be detected.

• Communicate to staff and board members that activities are being implemented to avoid and detect fraud and that there will be a zero tolerance for wrongoing.  Employees and board members can sign a written code of conduct that specifies the consequences of engaging in fraudulent behavior.  This can include termination of employment, being stripped of board membership, or even criminal prosecution.

• Facilitate reporting procedures.  Let employees know with whom they should share concerns.  They should be assured that calling attention to a problem with not affect their own position.

 3 Internal Controls that Reduce Association Fraud

When auditors conduct an independent audit one of things they do to determine an association’s fiscal health is to test the strength of the organization’s internal controls.  They examine

• What polices are in place?

• Are polices being followed?

• Are polices being followed consistently?

Internal controls govern the ways in which your association receives, holds, and spends money.  The three most essential controls are

• Safe Care and Custody of Assets – All your cash and the means of transferring it physically and digitally – checks, bank account numbers, account passwords, petty cash, credit card numbers – should be under lock and key.

• Separation of Duties  – Create policies that ensure multiple people are involved in the majority of transactions, such as dual signatures on checks over a certain amount.

• Transparency – An independent audit certified by an accountant and circulated among appropriate people within the organization demonstrates that you welcome professional scrutiny.

In the third part of our series on Independent Audits for Non-Profits, you’ll learn how to set-up an independent audit.