A charity organization need internal control to ensure that all the resources are properly utilized to achieve organization goals and varies projects. In order to reduce financial risk such as theft, internal control plays an important role. According to the case, the business process of nonprofit organizations is usually not well regulated. In my opinion, a nonprofit organization can implement the following controls to ensure transparency and accountability in its operations.
1. Segregation of duties. From what I learned from the case, the staffs that took money out of the United Way of America were served in a position for both authorization and recording. In general, they wrote checks to themselves and then adjust the financial records. Segregation of duties is the economic and efficient way to against those types of fraud. No single individual should be allowed to both authorize and record.
2. Documentation. All transactions, especially financial transactions, have to be recorded properly with all the supplemental documents. Nonprofit organizations should not only record any changes to their business process but also document the reason behind those changes.
3. Policy enforcement. Not like a normal business, a nonprofit organization usually does not have any written down business policies or code of conducts. Most of the nonprofits ignore this control because of their relatively small size. However, I think this control is also a key to prevent fraud. A good ethical standard and a good understanding of the business procedures can also provide nonprofits ways to reduce the fraud risks.
Q2
CPA firms have responsibilities to not only audit the nonprofit organizations but also help to reinforce a stronger internal control procedure. Nonprofits rely on internal controls to carry out their operations and reduce the risks. Thus, audit firms should give feedbacks and comments on the effectiveness of internal controls. Additionally, Sox act also “requires that the auditing firm report to the nonprofit audit committee all critical accounting policies and practices that are used by the organization, discussed with management, and represent the preferred way management wants these policies and practices treated.” The reduced audit fee should be a barrier to prevent audit firms from being responsible, it is simply the fact that auditing for nonprofits is not that complex and time consuming compared to a for profit business.
The CPA firms' main benefit is the audit fee that is normally negotiated with the organizations. Though Sox act prevent firms from doing non-audit services for the same client. This prohibition applies to “bookkeeping, financial information systems, appraisal services, actuarial services, management or human resource services, investment advice, legal services and other expert services. However, the CPA firm can provide tax preparation or other services as long as the service is less than 5% of the total audit fee and is pre-approved by the nonprofit’s audit committee.
Q3
Charity organizations usually spend revenues on projects and programs. They get donations from the public and then use the proceeds to serve the public. Since the donors act like investors, they want to make sure that their money is being utilized properly. Thus, charity organizations need to make sure that their operation is transparent and accountable. However, most of the charity organizations have less to none internal control. Staff might not have the suitable business skill to account varies financial transactions. In addition, the duties are usually not clearly separated. Charities hire volunteers as staffs. It is common to find that one individual works for several positions within the organization. Another problem is often volunteers do not get paid. They lack motivation and interest in the charities. This can pose serious risks for the organizations because the workers do not care too much. According to the cases, these two risk factors are very common.
Auditors must remain independent in their work at all times. Any activities with the client that may breach the principle of independence must be avoided. Audit firms should try as hard as possible to remain focused on their main duty, which is audit, and avoid taking other responsibilities requested by the client. Auditors have to understand the charity organizations well in order to develop a clear vision and knowledge on the business procedures and areas of risk. As presented in the case, most of the risks that charity organizations face are financial related, especially theft and fraud. Auditors should focus on measures to prevent these cases in the charities. When making recommendations to the charities, auditors should always advice the organizations to implement internal control system, such as bank reconciliation for cash accounts, and proper separation of duties within the organizations.