After raising millions of dollars, primarily from seven key donors, a nonprofit was ready to report on how the money had been used to carry out the organization’s mission. The only problem? It couldn’t show where the money had gone.
In fact, the nonprofit’s financial reporting was so unreliable that board members feared the employee who had set up the accounting system had deliberately botched the job to conceal fraud. Their suspicions grew when the employee left the organization abruptly and when they learned the employee had failed to properly integrate a third-party payment processor into the accounting system—leaving management with no way to access details about how money was spent.
Granted, the nonprofit organization had grown very quickly and had no written accounting policies or procedures. And the employee in question did not have an accounting background or knowledge.
Was this a case of an inexperienced employee who was in over their head or something more nefarious? The board of directors hired FSS to perform a financial forensic review to determine how the money was spent and to assess if wrongdoing had occurred.
Our approach in a financial forensic review is to gather, understand, and assess both quantitative and qualitative evidence to help us expose accounting anomalies and potential financial improprieties. This means, for example, that before we delved into the nonprofit’s numbers we gained a comprehensive understanding of the organization’s purpose and mission. With this information, we would be better able to identify transactions that fit the organization’s profile—and to spot those that deviated from it.
The review was extensive, covering a six-year period and nearly $55 million in major contributions and $20 million in disbursements. We deployed advanced data analytics to compare what the accounting system showed—i.e., what employees said had happened—with bank statements and third-party payment processor data—which showed how money actually flowed. This data and analysis allowed us to pinpoint transactions that failed to conform with the nonprofit’s purpose and mission.
As a result of our financial forensic review, we were able to provide the organization’s leaders with a complete picture of how money had been spent—including details of disbursements that appeared to deviate from the nonprofit’s mission.
The good news? While we found a few discrepancies between the accounting system and bank records, the amounts were minor and appeared to be the result of chaos and growing pains in an environment with non-existent accounting processes and procedures.
In the end, the FSS team recommended a set of policies and procedures for the accounting function. And the organization was able to use the details of our review and our recommendations to appropriately update its accounting system to produce reliable financial reporting.