Financial Statement Manipulation Risk

With a for profit company, the risk of manipulating earnings come from desire to keep owners/investors happy and compensation packages tied to earnings. When revenue decreases, the pressure increases on managers of all organizations. In a nonprofit organization, there are no owners but members and donors are key stakeholders. Donors want to see performance measures. They want to know that the organization is being a good steward. Based upon the revenue changes, and the compensation plan, you realize there will be increased pressure to manipulate the financial statements to appeal to donors.

In your review of the financial statements, you noted the shift in expenses from management and fundraising to programming. You also noted that Ms. Rose is compensated based upon increased donor revenue. Finally, you see that Ms. Rose is responsible for coding accounts and preparing the allocation of expenses between categories. Aware that donors want to see a high percentage of expenses related to programming, you become concerned. You carefully review the allocation of expenses and see that Ms. Rose has used different allocation techniques. (Exhibit 1) You question the results and find the Ms. Rose cannot justify the changes. Therefore, you ask Ms. Rose to go back and use the same allocation methodology as in prior years.

Thrift Shop Theft

Cash based businesses are prime targets for theft. Given that the gift shop has increased its sales of new merchandise, an increase in revenue should follow. The fact that expenses are up and revenue is not should spark concerns. Further, the store manager, Ms. Burgundy has significant control and there is a lack of segregation of duties between the person that counts the cash and the person that deposits the cash. You dig more carefully and note an average of $75 more in deposits on days when Ms. Burgundy is not working. Given your concerns, you arrange a fraud examiner to interview the store manager and Ms. Burgundy admits to stealing just a little bit every day. But $75 a day amounts to almost $20,000 in stolen funds.

Lack of Segregation of Duties in the Office

Because of the risk caused by a lack of segregation of duties, you spend a good deal of time examining deposits and disbursements. While you have reviewed all checks over $1,000, you decide to randomly select a list of checks to determine that they too have proper support. In your analysis, you discover no improper checks. You do note several missing checks but find that these were voided and are stored separately. You ask Ms. Gray why no one questioned the missing checks. She explains that committee members rarely ask questions, they do not look to see that all checks are accounted for and there is no check-signing log. Executive committee members must understand their role in verifying that all disbursements are properly supported. They need to understand that they are the final control in the process. Members should also be reviewing new vendors entered into the system as well as any adjusting journal entries. You do note that while executive committee members sign the checks, they do not sign a check log. Finally, you suggest executive committee members sign a check log verifying that all checks are present including any voided checks and that they note the first check number they sign follows the last check number signed the week prior.

Artwork

You note that artwork, while valuable is not inventoried as it is not considered a collection. You suggest that volunteers inventory all of the artwork and regularly monitor it. Theft of artwork in nonprofit organizations is a risk. Further, you make sure that the artwork is properly insured. In your review of the artwork, you note that a significant amount of artwork never made it from the old building to the new building. A visit to the former executive directors home reveals priceless pieces of artwork stolen from the office.

Deliverable:

Memo C Stop and Think

What questions could you/should you have asked to find the items above?

What other steps could you/should you have taken to find the items above?

Prepare a memo to your supervisor that explains what questions you should have asked and what step you should have taken as well as any potential liability.