Real Frauds Found in Not-for-Profits

Chapter 3Case 3: Pledges and Contributions

Learning objective

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

Before we start

Inherent risk is defined in AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards (AICPA Professional Standards), as the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. An example of an inherent fraud risk in NFPs could be 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 pledge receivables.

Indicators of receivable fraud could include the following:

• Unexplained differences noted on receivable confirmations received
• Significant or unusual adjustments to receivable records
• Entries made directly to revenue accounts rather than through an integrated subsidiary system
• Amounts deposited that are inconsistent with amounts due
• Significant credit balances in receivable accounts

Another fraud risk inherent ...