In February 2013, a former program director for a nurses' association pled guilty in a U.S. District Court to mail fraud and money laundering. Between 2005 and 2009, the director and the chapter treasurer diverted more than $425,000 in grant money for their personal use.1

All nonprofit organizations, regardless of their mission or size, should establish policies and procedures to ensure that "boards and officers understand their fiduciary responsibilities, assets are managed properly, and the charitable purposes of the organization are carried out. Failure to meet these obligations is a breach of fiduciary duty and can result in financial and other liabilities for the board of directors and the officers."2 Board directors, members, donors, parent organizations, and governmental agencies have an interest in ensuring good stewardship in handling and accounting for the money received by the organization.

Professional audit or review

State laws govern whether professional financial audits and reviews are necessary. Audits may be required based on the amount and types of outside funding received, the types of donors contributing to the organization, and whether fundraisers are used. Audits are conducted by independent certified public accountants (CPAs) and provide a high level of assurance that an organization's financial statements are fairly presented and free of misstatements.3 Audits, however, are also very expensive.

Reasons for audits include: "to protect the persons elected to offices of financial responsibility from unwarranted charges of careless or improper handling of funds; to build trust and confidence in supporters of the organization; to establish standards of fiscal responsibility to assure continuity in accountability; and to provide checks and balances for sums received and expended."4 A review conducted by a CPA, while less expensive, offers limited assurance based on less-extensive investigation. A review uses inquiry and analytical procedures to determine that the financial statements of an organization conform to generally accepted accounting principles.

Many nurse practitioner (NP) advocacy groups have modest budgets and lack the activities that would legally require an audit or review. An internal audit conducted by members of the organization is an alternative to CPA audits or reviews. Internal audits can provide similar oversight to assure accounting procedures are fair, complete, and accurate. They should be conducted at least annually as part of preparations for completing the group's tax reporting obligations or when the treasurer or financial officer change.

Internal audit

The first step in conducting an internal audit is selecting the members of an audit committee. According to Cheryl R. Olson, CPA and AICPA Not-for-Profit Audit Committee member: "...each audit committee must determine the appropriate number of members who are independent of management and have the required financial expertise."5 They should be familiar with the organization's activities and comfortable reading financial statements. They should be detail-oriented and systematic. They should not be involved directly in the activities that are being audited. The results reported by the internal audit team will include an independent verification of the treasurer's reports, assurance that proper steps are followed when handling funds, and an affirmation that funds are used for the group's mission.

The next step in the conduct of an internal review is to collect the accounting-related documents. The list includes finance policies and procedures, financial statements, bank and investment statements and their monthly or quarterly reconciliations, accounting records, and supporting documentation (cancelled checks, receipts, reimbursement vouchers, and deposit slips).

The New York State Attorney General's Office describes the finance policies and procedures that should be included in an internal review:

* The timing and distribution of reports that compare actual revenue and expenses to budgeted amounts

* The procedures for preparing checks and receiving cash established so that different individuals are responsible for each task

* The process for authorizing, verifying, and recording expenses

* Bank reconciliation preparation

* An appropriate records retention policy established to safeguard accounting data

* The schedule of required internal and/or external audits

* An organization chart including each board position and its related responsibilities

* Compliance obligations with federal and state governments.6

Finally, the audit committee should prepare and follow a checklist to ensure they review the items listed above. Free Church Accounting publishes an Internal Audit Checklist Guidelines that can be useful for this purpose.4 Below is a modified version of the checklist:

Financial statements

* Are monthly financial statements prepared in a timely manner and submitted to the board, appropriate person, or committee?

* Are account balances in the accounting records reconciled with the amounts presented in the financial statements?

Cash receipts

* Does the entity have procedures to receive cash?

* Are at least two unrelated people available to count cash?

* Do money handlers verify that amounts received match any statement included by the sender?

* Are money handlers rotated?

* Are all funds received promptly deposited?

Cash disbursements

* Are all disbursements paid by check?

* Are receipts available to support all checks?

* Are prenumbered checks used?

Bank statement reconciliation

* Are written reconciliations prepared in a timely manner?

* Are the reports signed and dated?

* Are any checks outstanding for several months?

Equipment records

* Are detailed records of the group's physical assets maintained?

* Was an equipment inventory taken at year end?

Payables

* Is any account payable significantly past due?

* Are there any disputes over balances owed?

Government reporting obligations

* Are payroll and information reports (IRS 1099-MISC for independent contractors paid more than $600, Form 990, the Nonprofit Tax Return, State Attorney General or Secretary of State Reports) filed on time?

Establishing controls and conducting internal reviews protect the organization and its board members. "Internal controls protect both assets and reputations. The task of the audit team requires diplomacy with determination. The purpose is to assure accuracy and protection."3 The Association of Certified Fraud Examiners, in its Report to the Nation, suggests that routine and surprise audits contribute to the perception that fraudulent activities will be identified and may preclude some frauds from occurring. "A wide variety of crimes and swindles fall under the umbrella of fraud. From Ponzi schemes and identity theft to data breaches and falsified expense reports, the ways perpetrators attempt to part victims from their money are extremely diverse and continually evolving. At their core, however, all frauds involve a violation of trust."7 Nonprofit groups account for less than 10% of all reported frauds. As the court case referenced in the introduction shows, fraud can occur even in the organizations of NPs.

Providing guidance

The information in this article is designed to provide guidance to board members of NP advocacy groups. It is not a substitute for advice from a qualified lawyer, independent public accountant, or other professional.

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