Accounting & Auditing

Nonprofit organizations receive many different types of revenue. Some nonprofits are government funded, while others receive funds from donors and foundations. Most nonprofit organizations conduct fundraising events to raise money for operations or for certain programs. Often nonprofits have annual fundraising events such as mailing campaigns,marathons, golf events, dinners, galas, and other events to raise funds for general use. Proceeds and expenses associated with these types of events are booked in the unrestricted/general fund. If the fundraising event is for a specific program or for something to happen in the following year, then money from the event is restricted.

Usually big fundraising events raise money for unrestricted use. This money raised is reported separately in the Statement of Activities in the unrestricted fund column. It’s also reported separate on the 990. Many times donors get something for their donation. This is known as a “quid pro quo” and may be a dinner or auctioned items. Someone makes a donation and gets something in return, such as the value of food, entertainment, or items bought at an auction, etc. This is also called “exchange value.”

Donors’ receipts must specify how much of a donation is a “real” donation, and how much is not. Donors may be able to deduct only the donation part of the gift. If a person gives $200 for a dinner fundraiser, and the ticket says “Value of the meal: $50,” then donor can deduct only $150 in his taxes, not the entire amount. In an auction, if something is valued at $1,000 and a donor gives $1,500 for it, the difference of $500 is the real donation.

When a donor makes a donation of $1,000 (or other amount) for a dinner fundraiser and doesn’t show up for whatever reason, he or she can deduct the entire amount. Beware that organizations are not supposed to determine the real deductibility of an item, which can change by person and circumstances.The IRS offers workshops to nonprofits about this topic. It also has a site just for nonprofit organizations at

Many times organizations combine fundraising activities with programs or with management and general administration. When that happens, a reasonable allocation of expenses may be used. Why? Because GAAP and an additional financial report, Schedule of Functional Expenses, require this allocation. (All expenses need to be allocated to the three major areas– general/management, programs, and fundraising.) Special events are shown separately in the Statement of Activities (Income Statement of nonprofits). If the event is not that important, revenues and “Direct donor benefit costs” can be shown as net. “Direct donor benefits costs” are direct expenses associated with the event.

The line for direct donor costs could also be reported as part of expenses. Another option for reporting major events is to use the exchange value and to divide the income between contributions and special event revenues (see quid-pro-quo discussion earlier). The fair market value is shown as special event revenue; the rest is shown as regular contribution.

This article is an excerpt from Sheila Shanker’s course Non-Profits Operations and Accounting.


In our previous post, we talked about the core competencies for interviewing. In the following post, we apply those compentencies in a step-by-step break down of how to conduct a successful interview.

 Break the ice
One of the biggest mistakes you can make as an interviewer is to immediately sit down and start hammering the interviewee with questions. Everyone needs a little time to get used to each other; you need to feel out the personality of the interviewee and he needs a moment to acknowledge that you aren’t that intimidating after all. So, start with something non-threatening and build common ground with the interviewee.

2. Brief the interviewee
Tell the client the objective of the audit and the purpose of the interview. Tell him what you hope to accomplish with this meeting. Then ask him if he has any questions. This makes sure he is clear on what you are doing and establishes more equal footing—more of a peer-to-peer relationship. Also tell the client about your status on the audit. Are you the in-charge or the staff person? Who do you answer to? This is another equalizer and folks always like to know the status of the person they are communicating with.

3. Obtain background information from auditee
Here is the interviewee’s chance to show his feathers—or establish his status. Giving the interviewee a chance to tell you more about himself goes a long way to reducing his fear. Sharing about his role in the company slowly levels the playing field and makes him feel more confident and trusting. Ask him to tell you about his:

  •  Job title
  • Scope of responsibility
  • Tenure

4. Ask interviewee if he has any questions
Before you begin with your questions, it is a good idea to ask the interviewee for his questions. Get all that baggage out of the way so you can have a clear, focused conversation. How you phrase this makes a difference. Ideally, you ask, “What are your questions?” This has a much more welcoming and non-judgmental tone than, “Do you have any questions?”, “Do you understand?”, or “Is there anything you need to say?” Each of the last three questions could be construed as mildly condescending.

5. Questioning
Here is where you get down to business. It is time for you to get answers to your most pertinent questions.  Instead of using a questionnaire filled with closed-ended yes/no questions, try using some open ended ones. It will make your interview more conversational and less like an  interrogation.

6. Summarize and paraphrase
Paraphrasing does several powerful things:

  •  It lets the interviewee know that you respect him enough to listen.
  •  It makes sure you “got it”.
  • It allows him to change his mind and save face by saying, “Oh, no. You misunderstood. What I meant to say was…”

The response to each significant question should be summarized or paraphrased as well as the results of the entire interview.

7. Close
After you have asked your questions and summarized the results verbally—basically parroted the main points of the interview back to the interviewee—you are ready to leave. But don’t just stand up and walk out the door. A little ritual is necessary here to maintain happy client relations.

Before you leave, you need to:

  •  Explain what happens next
  • Leave the door open for follow-up
  • Ask if the interviewee has any questions
  • Leave your business card
  • Say “Thank you”

8. Documenting the interview
Write down everything from your interview before you forget.  Don’t worry about formatting it or grammatical correctness, just write it all down. You can go back and edit it after your coffee break.

The information in this list was pulled from Leita Hart-Fanta’s  Essential Skills for the Government Auditor. To learn more about the role of the Auditor, be sure to check out her course.

I think it’s safe to say that most of us are not naturally good at interviewing. The first few times you conduct an interview may feel awkward, and you never know what to ask. All you want to do is get to the bottom of your list of questions so everyone can go back to their daily routines. Thankfully, our instructor Leita Hart-Fanta has put together a list of skills and competencies every auditor needs in order to conduct interviews and build client relationships.

Eleven competencies for interviewing
1. Analyze background materials
Coming into an interview unprepared can backfire on you. The client does not feel respected if you don’t know their name and the names of the others in the organization to whom you have already spoken. You should also be aware of this person’s job responsibilities and the objectives of their department.  Write everyone’s name down on a pad of paper and take it with you to the interview. Take an organization chart with you. Use whatever you need to jog your memory so that you show respect to the client.

2. Assure preparation of the meeting site
You called the meeting; therefore you are responsible for making sure that the meeting is held in an environment that is conducive to communicating. If the client is distracted or unable to concentrate on your questions because the environment is chaotic, noisy, or uncomfortable, then you – the leader of the meeting – need to do something to remedy the situation.

3. Establish and maintain credibility
Your credibility as an auditor will never come from knowing how the client’s accounts payable process works. You will never know their job as well as they do, nor should you or should they expect you to! Your credibility comes from knowing how an audit works and always having a “plan” – a clear next step, a confidence that lets the client know that you know what you are doing in terms of your job.

You can admit – and I suggest that you admit it frequently – that you don’t know the details about their job. Hesitate to admit that you don’t know what happens next on the audit or why you are asking certain questions. This alternative source of credibility – your knowledge of auditing – is what allows a 23-year-old to audit a 60-year-old finance executive’s job functions.

4. Manage the emotional and physical environment
If the client is upset over something, it won’t do you any good to keep hammering her with questions. As a matter of fact, it can do quite a bit of damage.

5. Demonstrate effective communication and presentation skills
This isn’t anything fancy. You just need to present your best self to the client. That self is clear spoken and energetic. You can go back to your desk later and rest or be bored. But in front of the client, you set the tone for the meeting and manner which it is conducted. It is a good idea to have an agenda and communicate that to the client up front. An agenda also helps you keep the meeting on track.

6. Demonstrate effective questioning skills
Close-ended questions get terse, close-ended responses. Build in open-ended questions that encourage the client to share. You do not have to have a witty follow-up question prepared for every statement the client makes. If you are worried about your next witty follow-up question, you aren’t listening… the focus of our next competency.

7. Demonstrate effective listening skills
If your mouth is moving, you aren’t listening. In most interviews, 90% of the words should be coming out of the client’s mouth.

8. Provide clarification and feedback
The client will be much more comfortable with you if you allow them to participate in the conversation by asking for their feedback and making sure they are clear about your audit objectives. A few well-placed, “What are your questions?” go a long way to build relationships and clear the air of any uncertainty or unpleasantness.

9. Record results in a clear manner
After an interview, get right back to your desk and document what was discussed. Don’t stop for coffee; don’t go to lunch. Sit down and type what you found out. Every minute between the interview and the typing is another chunk of your memory gone! You can edit and tweak it later to fit the format that your supervisor or manager prefers.

10. Resolve all outstanding issues
Sometimes, the client brings up things in an interview that don’t fit neatly into the scope of your audit. Unfortunately, we can’t just let those things simply “hang out” in our interview documentation. We must resolve them formally: report them, discuss them, add them to our audit plan, create a separate project for them, or formally include them in next year’s audit planning.

11. Evaluate interviewer’s performance
To get better at anything, you have to do a little self-examination. After each interview, ask yourself whether you did your best or whether there is anything you would want to change for your next interview. Interviewing is a competency that is learned by correcting mistakes and practicing.

Need to further sharpen your interview skills? Our next blog post will go over how to conduct a successful interview step by step. If you feel like you’ve already got enough interview experience under your belt and want to  learn more about what it takes to be a great Government Auditor, check our Leita Hart-Fanta’s course Essential Skills for the Government Auditor (You can even earn 9 CPE hours).

An interview with Paul McCormack, fraud investigator and educator…

How many fraud suspects have you interviewed in the course of your career as a certified fraud examiner?

After the first hundred, I actually stopped counting, but I’ve easily interviewed more than 500 people while investigating employee and third party fraud.

How is interviewing a fraud suspect different from the interrogations we see dramatized on TV?

The goals are very different. On TV, the actor-detective wants to force a confession. It makes for entertaining television. The goal of the interview in a private company is to encourage the employee to share information. Threatening him or her, with termination or legal action, isn’t appropriate or effective. In fact, there are legal risks to it. Tactics that may be appropriate for law enforcement can get you in trouble if you employ them as an interviewer in a corporation.

What qualities make a good fraud interviewer?

A good fraud interviewer knows how to connect with people. I don’t mean in a jovial way. He or she must be able to understand a person’s thought processes as well as their body language and use them to drive the interview. A good interviewer is able to listen intently to what the employee is saying. And not saying. They are adept at establishing rapport. A good fraud interviewer must be able to maintain composure, no matter how the employee reacts, and be creative in figuring out how to get the employee to talk.

How do you prepare before you go into the room with the employee?

You start by taking a hard look at the documents you have and trying to explain the employee actions in context. Could the transaction in question be the result of a system error or a process problem or a lack of employee training, and not fraud? Could we be misreading the document? You develop hypotheses and try to disprove them before doing any interviews.

Preparation before going into the interview room is crucial. You want to learn as much as possible about the individual whom you are about to meet. You conduct mock interviews and role-play all the scenarios you can think of. Mock interviews allow you to test your data again and develop confidence in your exhibit. I’d say for every hour spent in the interview room, three hours are spent preparing.

What do you hope to get out of the interview?

I want to stress that proving someone guilty or innocent is not the goal. The performance of investigators should never be judged on how many confessions they get or how many employees are terminated as a result of their investigations. That creates an incentive to chase the easiest cases. The goal is to find, validate, and provide facts so that others can make fully informed decisions regarding an employee’s employment status.

Throughout the interview, you have to keep asking yourself, “am I getting the information I need to write a report that someone else can view as complete?”

What’s the biggest mistake a fraud interviewer can make?

The worst mistake is assuming the target of the investigation is guilty and it’s your job to prove it. Going into an interrogation with a predefined conclusion can get you in trouble. You may believe the evidence is stronger and more compelling than it actually is. You may think that the documents speak for themselves when they don’t. You may not ask questions that need to be asked.

Each investigation has to be conducted with the same view to gathering facts, understanding the facts, and allowing others to interpret those facts. The worst thing that can happen is for an investigator to shortcut that process and believe that they are the proverbial judge, jury, and executioner.

For McCormack’s best practices for fraud detection and prevention, listen to his free webcast on The Threat Within: Combat Employee Embezzlement.

CPAs who are fluent in the language of financial statements have an edge in client loyalty and career advancement.

True fluency is more than a number-crunching ability. It is the ability to translate financial statements on the fly, explain in simple terms what the numbers mean for the client’s business, and make recommendations.

Financial-statement fluency is a continuum, says Linda Keith, CPA, CSP, independent consultant and a new instructor for CPE Link.

“There are clients who don’t know the language at all. For them, a financial statement is like a foreign newspaper; they recognize it as a newspaper, but they can’t get anything out of it. There are CPAs who can study the statements and get some useful information for decision-making, but it takes time and focus. There are other CPAs who can look at a set of financials and draw conclusions almost instantly. And finally, there are some who can translate what they see so obviously in the financial statements into language that the client understands.”

These adept CPAs are a select few, says Keith. “Any assumption that, because we have an accounting degree or have attained a CPA license, we are as far along that continuum as our clients or our employers would like us to be is not accurate.” says Keith.

As a public accountant, Keith’s favorite part of the job wasn’t creating the financial statements; it was explaining them. So she began training bankers how to analyze tax returns to determine cash flow available to pay debt. “Lenders don’t need to know everything the CPA knows about tax returns, but the part they do need to know, they really need to understand well,” says Keith.

Since 1979, Keith has been a trainer on a mission to improve the ability of CPAs and others to translate financial statements. “In many cases CPAs in public practice are providing financial statements but not adding the extra explanation that will lead to actionable insights by clients. And clients often don’t realize they could get more benefit from what the CPA is doing. Let’s move from numbers to insights that allow us to make or recommend decisions,” she urges.

Why go to the trouble? The answer is simple: client loyalty, says Keith. Clients’ loyalty to an accounting firm depends on the value they get from the relationship. If they can get the same thing from every other CPA in town, they have no reason to be loyal. “No one recommends with much gusto a CPA who just spits out the numbers,” says Keith. “But give them insights about what’s going on in their business and they’ll keeping coming to you as a trusted advisor,” says Keith.

How fluent are you with financial statements? View Keith’s free webinar on Financial Statement Basics: Balance Sheets, Income Statements and Cash Flow.

A business needs a set of well-designed procedures to ensure that its transactions are completed in a uniform manner. Otherwise, a company will experience inefficiencies and an increased incidence of fraud, and will spend an inordinate amount of time correcting transaction errors.

A procedure documents a business transaction. As such, it lists the specific steps required to complete a transaction, and is very useful for enforcing a high degree of uniformity in how those steps are completed. A procedure frequently incorporates one or more controls, which are designed to mitigate the risk of various types of losses. In some cases, an entire procedure is intended to be a control. Procedures may also be used to instruct new employees in how a company does business.

From the perspective of the management team, the first purpose (uniformity) is the most important, since it leads to greater efficiency. However, an auditor or risk manager may be more concerned with the second purpose (control), since they have a great interest in mitigating any number of risks to which a business is subjected. Further, the human resources staff has a great interest in the third purpose (training). Thus, there are multiple constituencies within a business that have a considerable interest in the construction and maintenance of a set of procedures.

Procedures are needed to ensure that a company is capable of completing its objectives. For example, the primary purpose of a consumer products company is to place reliable and well-constructed products in the hands of its customers. In order to sell goods to those customers, it must be able to complete the following tasks consistently, time after time:

  • Log in a customer order
  • Pick the goods from stock
  • Assemble them into a complete order that is ready for shipment by the promised date
  • Reliably issue an accurate invoice to the customer

A procedure is needed to give structure to these activities. For example, one procedure could instruct the order entry staff regarding how to record order information from a customer into a sales order (which is used to process an order within a company), which errors may arise and how to deal with them, and where to send copies of the sales order.

It is certainly possible for very experienced employees to handle these tasks without a formal procedure, because they have been with the company long enough to have learned how to deal with most situations through experience. However, such an approach relies upon the verbal transfer of information to more junior employees, which is an unreliable approach that gradually leads to the use of many variations on a single procedure.

Imagine a situation where there are no formal procedures in a company that operates multiple retail stores. Each store develops its own methods for handling business transactions. Each one will have different control problems, different forms, different levels of efficiency, and different types of errors. Someone trying to review the operations of all the stores would be overwhelmed by the cacophony of different methods.

You can see from this example that procedures are of great value in providing structure to a business – they define how a business does things.

Where do you stand on procedures?

Blog information from Steven Bragg’s Accounting Procedures course.

An interview with Paul McCormack, fraud investigator and educator…

Paul McCormack, CFE, has 17 years of fraud investigation and detection experience gained in banking, real estate, manufacturing, transportation and insurance. He currently serves as Executive Vice President with Connectics Advisory Services, based in Atlanta, GA. He has also held positions with Innovar Partners, SunTrust Bank, Ernst & Young, Delta Air Lines, PricewaterhouseCoopers, and Putnam Hayes & Bartlett. Throughout his career, Paul has assisted local law enforcement agencies, FBI, DEA, and the Secret Service.

As a fraud investigator and educator, what’s the most common misconception you encounter about employee fraud?

“It won’t happen here. I trust my employees. They would never do that to me.” Ignoring fraud or thinking that it won’t happen in your company is wishful thinking. The business press is full of companies that thought exactly the same way. Many have been forced to close their doors as a direct result of employee fraud.

What is one of the worst cases of employee fraud that you’ve investigated?

I lead an investigation involving allegations of fraud regarding the actions of the CEO, CFO, General Counsel and SVP of sales at a mid-sized company. Almost all of the allegations turned out to be true. The investigation uncovered rampant fraud and abuse including expense fraud, accounts payable fraud, accounts receivable fraud, kickbacks, payroll fraud and financial statement fraud. Each of the executives had turned a blind eye to the fraud being committed by the others. The parent company was so disgusted with the results of the investigation that it closed the company and moved the operations to another state. Three executives were fired, the fourth resigned, and 50 employees lost their jobs. The company declined to notify law enforcement in order to avoid the adverse publicity.

How big is the problem of employee fraud?

The Association of Certified Fraud Examiners (ACFE) estimates that worldwide $2.9 trillion is lost to fraud each year. The median loss to a small business is $155,000. There is also incalculable damage to customer and investor trust.

What are the chances of getting the money back?

Fraud losses are rarely recovered. Fraud schemes last a median of 18 months. During that time, the fraudster is buying things, paying down debt, or sharing your money with their family and friends. They typically don’t deposit the money in the bank and watch it earn interest. Making matters worse, thinly stretched law enforcement is often unable or unwilling to help recover fraud losses. Financial crimes can be extremely complicated and time consuming to investigate. Detectives need to close cases quickly. At the federal level, the bar is even higher. A six-figure loss may be devastating for your organization, but it may barely raise the eyebrow of an FBI agent in a large city. With no connection to organized crime, drugs or terrorism, the case file may be shelved and forgotten. Civil lawsuits won’t get the money back either. Even if entirely successful, amounts recovered will be reduced by professional fees paid to attorneys, forensic accountants, etc.

What trends in fraud are you seeing?

I sometimes open my presentations with this quote from the economist John Kenneth Galbraith: “The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”

With that said, cloud computing and Internet banking have helped employees successfully steal proprietary data and funds at an alarming rate. Coupled with lack of employee oversight and you have the proverbial “recipe for disaster”.

So what can businesses do to prevent employee fraud?

First of all, they need to set the tone for honesty and integrity at the top. If executives are viewed by employees as unethical, it makes it far easier for them to justify committing fraud. Further, companies where the executives are morally bankrupt rarely view fraud prevention as a priority. As such the company normally has a very weak internal control framework in place to combat fraud.

Paul McCormack teaches the CPE Link course, The Threat Within: Combat Employee Embezzlement

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