Not-for-Profit Accounting Help eNewsletter
April 18, 2011
Nancy Church, CPA
www.NFPAccountingHelp.org
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Contents
1. Not-for-Profit Accounting Help’s Resources
2. Feature: Costy Inaction
3. About the Not-for-Profit Accounting Help eNewsletter
1. Not-for-Profit Accounting Help’s Resources
The Book: Do you want an accounting guide that not only tells you what to do but how to do it? Buy Not-for-Profit Accounting Help: A Very Practical Manual for Bookkeepers, Accountants, and Finance Directors of Small Nonprofits (second edition) at www.NFPAccountingHelp.org as a downloadable .pdf or as a spiral-bound full-size paperback. It’s both a guide to the complex world of accounting for nonprofits and a resource you can keep close at hand to answer your questions as they come up.
The First 100is a collection of 100 articles from newsletters over a period of three years. They are as relevant today as they were when they were written. You can get it as a .pdf document in the on-line store at www.NFPAccountingHelp.org.
The Website:You’ll find the most recent issue of the newsletter posted at www.NFPAccountingHelp.org. There’s a record retention guide, a sample chart of accounts, and a chapter from the book there, too.
2. Feature: Costly Inaction
Auditors document, and in some cases assess the effectiveness of, your system of internal controls during an audit, whether they are CPAs performing an independent audit of your financial statements or internal auditors, and once they’ve done that, they’ll tell you how to tighten up your procedures to better prevent fraud or catch errors. Of course the risks remain unless your organization implements their recommendations.
In 2001, the Washington State auditor advised Seattle Public Schools that its timesheets were vulnerable to alteration, according to an article in the Seattle Times newspaper in June, 2007. Apparently, they were not secured after they’d been signed by supervisors and employees could therefore modify them before payroll was actually processed.
The following year, the auditor returned to discover that no action had been taken on his recommendation, and he made it again. In fact, he repeated the same recommendation for several more years - 2003, 2004 and 2005 - and in some of those years, he was able to site evidence of losses of between $1,800 and $12,000 due to this weakness in internal controls. Still, the school district took no action.
Then, in 2007, a major embezzlement was discovered: one employee had been overpaid by an estimated $179,000.
In 1992 (yes, 15 years before she was discovered!) this employee began padding her hours on her timesheets. The article says that $120,000 was stolen between 2002 and 2007. Do the math and you’ll realize that for the first ten years, she stole an average of $8,000 a year, and for the last five years, that average increased to $24,000. In other words, she grew drasticaly bolder over the course of her deviousness. Why would that be?
First, she didn’t get caught. Consider, too, that she might have been aware of the auditor’s recommendation. Seeing that nobody was taking his report seriously enough to actually implement changes, she grew more and more comfortable with the risk she was taking. This follows a typical pattern that thieves often exhibit: they take a small amount and wait to see what happens. If nothing happens, they take more…and their thievery continues to escalate.
Had the payroll system been tightened up at any point, her crimes could have been stopped, but the school district chose not to take the auditor’s advice. The article in the Times quotes a Seattle School district spokeswoman as saying the administration knew there was a problem and had a “heightened awareness” of it, but “no specific additonal procedures have been put in place.” Well.
It’s not only state auditors that look at internal control and make recommendations for improving it – independent CPAs, auditors from other branches of government, and even auditors from foundations that support an organization may do the same thing. What should you do with their findings?
First, discuss all the comments with the auditors and with the decision-making members of your management team who are affected by them. Some comments may indicate the auditors don’t really understand your organization and how it works. If there really is no weakness and no chance that the organization could experience theft of assets, you should be able to put the auditors at ease and, in some cases, even see the comment removed from their letter. But it’s far more common in my experience that clients dismiss auditors’ advice without implementing it because it seems as if changing things will be too much trouble or because they just don’t see the danger. Often, they believe that their organization is safe because the people they work with are “trustworthy”.
Remember the fraud triangle: motivation, rationalization and opportunity. It takes all three to turn a trustworthy person into a thief. The first two are personal to the individual and we won't even know they're present, let alone control them. We can,however, close all doors to the opportunity.
3. About the Not-for-Profit Accounting Help! eNewsletter
NFPAccountingHelp’s enewsletter serves nonprofit organizations by providing practical, sound advice for staff and volunteers responsible for bookkeeping, accounting, reporting and financial or administrative oversight.
You can share the newsletter with others, or use one of the articles. Just acknowledge where you got it: www.NFPAccountingHelp.org.
Your comments and responses or requests for articles on certain topics make my day. Send them to: Nancy@NFPAccountingHelp.org.
- Nancy