For-profits and Nonprofits Share Audit Issues

by Gary Snyder

For-profit Accounting

In a recent study, auditors performed complete and correct audits amounted to only 5 percent of the 60 audits reviewed by the Public Company Accounting Oversight Board but it may still be a sign of progress. During the previous year — the first in which the board reviewed such audits — none of the 23 audits examined were found to be acceptable.

If this were baseball, the combined industry would be batting .036 for the two years combined.

The audit problems do not necessarily mean that many of the brokerage firms’ financial statements were wrong. Instead, they indicate that the auditing firms either had conflicts of interest that prevented them from doing an independent audit or that those audits failed to do the work needed to qualify as acceptable.

In most — 37 of the 60 audits reviewed in 2012 — the auditors failed to do enough work to assess the “risk of material misstatement due to fraud,” the board reported. In some cases, auditors made no effort to verify entire revenue streams received by the firms.

There were also a substantial number of audits with deficiencies in the review of related party transactions — including one case in which the board said the auditor had evidence that such a transaction had been accounted for incorrectly “to avoid an adverse effect on net capital.” Net capital rules, issued by the Securities and Exchange Commission, determine how much capital a brokerage firm needs to protect its customers.

In 22 of the audits, the audit firm was not independent of the brokerage firm, as required by audit rules. In some cases, the auditor had helped to prepare the financial statements and was therefore reviewing its own work.

Nonprofit Accounting

Silence: The Impending Threat to the Charitable Sector addresses similar problems with nonprofits.

Some accountants have intrinsic conflicts of interest in the nonprofit world as well. Giving advice can be only ten percent of the amount a consulting firm can make in its relationship with an organization. So rather than jeopardize the other consulting work, their recommendations can be distorted. They never want to jeopardize the relationship with the managers that hire them; so the paid compensation consultant’s studies, for example, usually result in higher salaries. In executive searches, when boards hire consultants, the consultants want to ingratiate themselves to the board which affects the executive hiring process often resulting in lavish pay. This shores up the board’s belief that it has chosen wisely in hiring executives. Being told to pay an executive lavishly confirms the board’s perspicacity in hiring that individual. 

Accountants frequently have little knowledge about nonprofits and fewer have a thorough understanding of the IRS 990 Form and its current upgrades. Many leading auditors gave a clean bill of health to the United Way, the Alleghany Health, Education and Research Foundation, and the Baptist Foundation of Arizona shortly before their noteworthy collapses. 

A 2008 report from the Association of Certified Fraud Examiners found that 48.8 percent of all nonprofit fraud cases tips came from employees, while external auditors found only 14.9 percent. Of the total fraud claims by engagement, 36% result from audit engagements, while 43% of the fraud claims result from review, compilation, tax and accounting service engagements. 

It is a known fact that the committee structure is the foundation of good governance. The audit committee is certainly the essential component of the committees. With the revision of the IRS 990 Form, proactive steps are essential for transparency and accountability. While the finance committee is to monitor and provide guidance on the charity’s financial matters, the audit committee is responsible for providing the oversight over of the agency’s audit and other areas involving financial management. The audit committee serves a key role in helping the board full its fiduciary responsibilities. Some of those responsibilities may include:

·      Oversee the hiring of the auditors, including communications with the auditors regarding the audit process, timing, issues, as well as the competence of the executive;

·      Assess business and fraud risk for the organization and determine plans to address the risks;

·      Monitor accounting practices;

·      Monitor the internal control process;

·      Establish policies to prevent fraud, including developing a whistleblower policy.

The ultimate goal for the audit committee is to ensure accurate financial reporting. Effective oversight rests with the board, in concert with the staff. Should they fail, they could be exposed to potential legal liabilities.

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Charity Navigator, Vermont Public Radio, Miami Herald, National Public Radio (NPR), Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), “Betrayal”, (a movie), NBC (on Charity Fraud…TBD), FOX2, ABC Spotlight on the News, WWJ Radio, Marie Claire, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, Charity Navigator, The Chronicle of Philanthropy, St. Petersburg Times, Board Room Insider, USA Today Topics, Accountants News, Newsweek.com, Responsive Philanthropy Magazine, New York Times, Portfolio Magazine, The Virgin Islands Daily News, NANKAI (China) BUSINESS REVIEW, National Religious Broadcasters newsletter, The Charity Governance Blog, American Chronicle, Palm Beach Post, Detroit Free Press, Oakland Press, Nonprofit World, Socially Responsible Business Forum, PNNOnline, Ohio Nonprofit Resources, Nonprofit Good Practice Guide, Nonprofit Startup Guide, Nonprofit Blog, National Coalition of Homeless Newsletter, Finance and Administration Roundtable Newsletter, MichiganNonprofit.com, CORP! Magazine, Crain’s Michigan Nonprofit, ncrp.org, PhilanTopic, Nashville Free Press, Nonprofit Law Blog, Seniors World Chronicle, Carnegie Reporter, Assoc. of Certified Fraud Examiners Examiner, msnbc.com, Worchester (MA) Telegram and Gazette, Carnegie Corporation of America, EO Tax Journal, Wikipedia: Non-profit Organizations; Parent: Wise Austin, Accountants News, Veterans Today, Answers.com, Far-roundtable, #Nonprofit Report, nonprofithelpnews, nonprofit news; National Enquirer, Northwest Herald, The HelpWise Daily, The #Nonprofit Report, Wikipedia (Nonprofit Organization), Answers.com, Nonprofits: On the Brink (2006) Silence: The Impending Threat to the Charitable Sector (2011)