Frequent Frauds Found in Governments and Not-for-Profits

Chapter 6 CASE 6: PLEDGES AND CONTRIBUTIONS

LEARNING OBJECTIVES

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

•     Determine how various board incentives and mandates in a fictitious not-for-profit (NFP) entity may be possible indicators of fraud.

•     Identify how the fraud triangle may affect audit planning in an audit of a fictitious NFP involved in major fundraising.

BEFORE WE START

An inherent fraud risk in NFPs is the incentive to overstate revenues or results in an effort to obtain additional grant funds or contributions from resource providers. Although pledge receivables are not technically “accounts” receivable from a legal and accounting perspective, the indicators of receivable fraud are appropriate “proxies” for indicators of fraud in pledges receivables.

Indicators of receivable fraud include the following:

•     Unexplained differences noted on receivable confirmations received

•     Significant or unusual adjustments to receivable records

•     Amounts deposited inconsistent with amounts due

•     Significant credit balances in receivable accounts

Another fraud risk inherent in many NFPs receiving contributions is that NFPs may feel pressure to misstate functional amounts to maximize program expenses. Additionally, mission-driven employees and directors may be willing to misrepresent amounts in the financial statements in order to provide more program services.

THE CASE

We Care is a 501(c)(3) whose mission is to provide temporary ...