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Detecting fraud in the governmental and not-for-profit environments is particularly difficult for several reasons, including their unconventional revenue and expense streams, typically understaffed accounting departments and the nature of their operations. This course will discuss the auditor’s responsibility to detect fraud and typical types of fraud noted in these sectors of the economy.
Objectives:
Prerequisite: Knowledge of government and not-for-profit sectors.
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Course Objectives
During this course, you will
• Identify the unique situations that exist in governmental and not-for-profit organizations that create or increase the potential for fraud.
• Understand how objectives of financial reporting and the users of financial statements for governmental and not-for-profit organizations differ from those in the private sector and how such differences need to be addressed in planning and performing the audit.
• Obtain a thorough understanding of the requirements of SAS No. 99 and how they impact the audits of governmental and not-for-profit organizations.
• Integrate all aspects of the requirements of SAS No. 99 in the audits of governmental and not-for-profit organizations from identification of fraud risks through documentation and communication of fraud and fraud risks.
• Apply specific professional standards to fraudulent financial reporting and misappropriation of assets using case studies in governmental and not-for-profit audit engagements.
• Apply specific professional standards to responding, documenting, and reporting fraud using case studies in governmental and not-for-profit audit engagements.
Introduction
In the early years of the twenty-first century, the accounting profession experienced some of its darkest days since the 1938 McKesson-Robbins corporate accounting scandal. Massive scandals in the early 2000s at Enron, WorldCom, and Global Crossing put all CPAs in the spotlight whether they were auditors of publicly traded companies or small closely held family corporations. To protect the American public against such spectacular failures in the future, President George W. Bush signed the Sarbanes-Oxley Act into law in the summer of 2002.
It is interesting to note that while Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit, (hereafter referred to as SAS No. 99) was released after the passage of the Sarbanes-Oxley Act; it was not issued in response to the failures giving rise to its passage. SAS No. 99 was the result of a four-year process that began with five academic research studies conducted as part of the AICPA Fraud Research Steering Task Force. In addition to these studies, the Public Oversight Board, at the request of the Securities and Exchange Commission, appointed a Panel on Audit Effectiveness in 1998. This Panel conducted its own research primarily related to audit effectiveness and issued a report in August of 2000.
Using these studies and other information, the AICPA Fraud Task Force established in September of 2000, reviewed SAS No. 82, Consideration of Fraud in a Financial Statement Audit, and concluded it was fundamentally sound. The recommendations of this task force to enhance professional auditing standards related to fraud were incorporated in the exposure draft issued February 28, 2002, which was adopted as SAS No. 99 in October of 2002.
Fraud has become a major focus among not only financial statement users but also among many Americans in their roles as investors, watch dogs, philanthropists, or private citizens. In the last 20 years, news reports have often revealed fraud and abuse at all levels of governmental and notfor- profit organizations. The national level United Way scandal of the early 1990s had a significant negative impact on many local United Way agencies. Americans were outraged to learn the Federal government had spent thousands of dollars for items found at the local building supply store for less than $100.
Individuals and businesses contributing to not-for-profit organizations have a legitimate expectation that their donations will be used to further the mission of the not-for-profit organization. When such funds are at best, diverted for other uses, or worst case, appropriated for personal gain, the reputation of the not-for-profit organization is jeopardized. In such cases, the lack of trust potential individual and corporate donors have in the not-for-profit organization can seriously impact its revenues and, correspondingly, its continued existence.
For citizens, fraud in governmental organizations is a misuse of the public funds they provided to the government without choice and in good faith. Such breaches of trust further erode their tenuous faith in the "American Way" and needlessly increase the cost of providing public goods and services. Simply put, everyone loses when fraud occurs in governmental organizations.
This course is designed to give auditors and accounting and finance professionals a working knowledge of SAS No. 99 and its unique applications in the governmental and not-for-profit environment. It is also intended to assist the auditor of governmental and not-for-profit organizations in planning and performing their audit as well as in responding, documenting, and reporting fraud. An understanding of the governmental and not-for-profit environment, coupled with a thorough knowledge of the requirements of SAS No. 99, improves the likelihood the auditor will detect material financial statement misstatements due to fraud.
Organization
This course deals with AICPA auditing standards related to fraud in audits of governmental and not-for-profit organizations. To that end, the materials are organized into the following chapters:
• Chapter 1 provides an overview of the governmental and not-for-profit environments focusing on the unique operational, financial reporting, and accounting principles of these organizations. Special emphasis is placed on how these differences impact audit planning and procedures related to fraud.
• Chapter 2 summarizes the audit standards set forth in SAS No. 99 related to fraud considerations in financial statement audits.
• Chapter 3 delves into how the requirements of SAS No. 99 relate to audits of governmental and not-for-profit organizations and how these standards can be incorporated in planning and performing audits of these organizations.
• Chapter 4 delves into specific areas of concern related to fraudulent financial reporting in governmental and not-for-profit organizations. Case studies are used to apply these specific concepts of SAS No. 99 to audits of governmental and not-for-profit organizations.
• Chapter 5 explores specific areas of concern related to misappropriation of assets in governmental and not-for-profit organizations. Case studies are used to apply these specific concepts of SAS No. 99 to audits of governmental and not-for-profit organizations.
• Chapter 6 covers other matters related to fraud in governmental and not-for-profit organizations.
• Appendices include practice aids and professional publications to aid in audits of governmental and not-for-profit organizations.
Summary
This course is designed to provide auditors of governmental and not-for-profit organizations an overview of the specific challenges they face in applying professional standards related to fraud to audits of these entities. Additionally, this course provides a number of suggested practices, procedures, and practice aids to assist auditors in implementing professional auditing standards related to fraud in governmental and not-for-profit organizations.
Conclusion
It is hoped that these course materials prove useful primarily to auditors of governmental and not-for-profit organizations but also to those accounting and finance personnel employed in such organizations.
Throughout these course materials, the terms he and she are used alternately and no discrimination or implications related to either gender are intended. Additionally, the course materials, including the appendices, have been developed using the professional and industry standards, practices, and procedures in effect at the time of the writing. Auditors and other professionals should consult current authoritative guidance in addition to these materials.
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