McKenzie Forensic Auditors, Inc

Independent Audits Rarely Catch Fraud

Independent Audits Rarely Catch Fraud
While independent audits are useful and may help prevent fraud, they are not designed to detect it. Even if a nonprofit undergoes an audit or financial review, auditors cannot guarantee the absence of fraud. Audits simply offer reasonable assurance that the financial statements are accurate. Detecting fraud requires identifying deception or misrepresentation—something that’s hard for auditors to do when they must rely on information provided by the nonprofit. So, if your goal is to reduce fraud risk, focus on governance practices.

Did You Know?

According to the Association of Certified Fraud Examiners (ACFE), tips—not audits—are the most common way fraud is uncovered. Smaller nonprofits often suffer greater losses when fraud does occur. Although audits are a common anti-fraud measure, they should be just one part of a broader strategy. Educating staff is key to prevention. One way to do this is by inviting your insurance provider, bank representative, or even local law enforcement to speak at a board or staff meeting about common fraud schemes.

Let your board know what steps are being taken to prevent and detect fraud. Here are some best practices to consider:
Create an open culture where employees feel safe reporting concerns. Organizations with ethics hotlines detect fraud much faster—up to 50% quicker.
Implement a whistleblower policy, and ensure that staff and board members know about it.
Clearly explain reporting procedures for financial misconduct in the employee handbook and during board orientation. Many nonprofits assign this role to the Chair of the audit committee.
Encourage scenario-based training, where staff role-play fraud-related situations.
Educate staff and board members about what constitutes fraud and its consequences—lost donations, bad publicity, lower morale, and even job losses.
Adopt a zero-tolerance policy and require staff to sign a Code of Conduct that spells out expectations and penalties, including termination for fraud.
Define the board’s role in handling fraud allegations and investigations.
Commit to pressing charges in fraud cases. This can also be required by your insurance provider to ensure coverage.

The Importance of Internal Controls

Even though audits don’t usually uncover fraud, strong internal controls can prevent theft and embezzlement. These controls don’t have to be complex—even small nonprofits can implement effective safeguards. Auditors often review internal controls during audits to see if policies are in place and consistently followed.

Want help assessing your risks? Send us an email to request a 15-minute risk assessment memo. nathaniel@mckenzieforensic.com

Learn More

Preventing Fraud in Nonprofits

Preventing Fraud in Nonprofits

Preventing Fraud In Non-Profits

Independent Audits Rarely Catch Fraud

Preventing Fraud in Nonprofits

Preventing Fraud in Nonprofits

Preventing Fraud In Non-Profits

Independent Audits Rarely Catch Fraud

This website uses cookies.