Q&As

Why didn't the auditors catch it? That's the first question many people ask when confronted with a case of financial wrongdoing at a nonprofit organization.

Answering that question requires an understanding of the auditor's role. An auditor is an outside accountant engaged by the board of a nonprofit to review the financial statements prepared by the organization's staff. The auditor's main job is to judge the accuracy of the financial statements and report back to the board. To do this, auditors usually examine some typical transactions and review internal controls, accounting procedures, and financial reporting systems. Through the management letter, auditors also help nonprofits develop effective financial controls.

An audit is a spot check of information, not an exhaustive review of all financial transactions. Further, auditors are charged with determining the accuracy of the financial statements only "in all material respects." A clean bill of health from an auditor means that the auditor is convinced that the financial statements do not misrepresent the organization's financial position in any significant way; it does not guarantee 100 percent accuracy.

Auditors are not charged specifically with uncovering fraud. Since they rely heavily on management to provide information and documentation, small-scale fraud is extremely difficult for auditors to detect, particularly if it is being perpetuated by more than one key staff person within the organization.

An important final point: all firms are not equally qualified to audit a nonprofit organization. Nonprofits follow accounting conventions that are distinct from those of business and government. A firm that is unfamiliar with these guidelines or has little experience auditing nonprofits will be especially unlikely to uncover financial malfeasance.

For more information, see the Financial section or our bookstore.