Frequent Frauds Found in Governments and Not-for-Profits

Chapter 4 CASE 4: GRANT EXPENSE ALLOCATIONS

LEARNING OBJECTIVES

After completing this chapter, you should be able to do the following:

•     Analyze how procurement and expense allocation policies in a fictitious not-for-profit (NFP) entity can be circumvented and lead to possible fraud.

•     Identify types of audit procedures typically effective in responding to the fraud risks discussed in this case.

BEFORE WE START

Grantors and grant recipients may have a long-term and close relationship which could create fraud risks. For example, an NFP may be the only organization in a rural area that is able to provide certain services to a targeted population. Likewise, an NFP may have an excellent reputation in the community or region relating to the provision of specific types of services. In these situations, a grantor might be willing to provide less oversight to such organizations in exchange for the NFP providing exclusive or high quality services (or both) to program beneficiaries. Therefore, the auditor will need to determine what relationships exist between their NFP clients and the granting agencies and their personnel.

An inherent fraud risk in NFPs receiving grants is that they may feel pressure to misstate functional amounts to comply with grant provisions or debt covenants. Additionally, mission-driven employees and directors may be willing to allocate unallowable costs to grants in order to provide more program services.

THE CASE

Seniors Forever is a 501(c)(3) corporation ...